Some of the notable factors contributing to this systemic change include a sustained federal financial spending policy, continued growth of wages and labor shortages. Other factors include a vacillating energy transition from fossil fuels to carbon-neutral sources and intensifying geopolitical concerns.

“Commercial real estate credit is attractive since it offers equity-like returns with lower levels of risk due to its seniority in the capital stack.”

Considering this new macroeconomic backdrop, a popular question is, what does this mean for investor portfolios? One prudent move would be to increase allocations in collateral-based cash flows backed by hard assets such as real estate.

More specifically, it makes sense to increase one’s exposure to private real estate credit as banks, which traditionally have been leaders in commercial mortgage lending, have restrained their lending practices. This has created opportunities for nonbank lenders to gain market share from bankable sponsors eager to get their projects financed.

At the same time, the asset class’s expanded revenues have created a compelling risk-adjusted yield, whereby when inflation moves up, so does revenue. This is a major change from the past 10 years when the theme was long growth, long duration and fixed income. We are now in a different environment where the playbook has changed and investors need to adapt.

Investment solutions

The ability to generate stable, inflation-linked income through commercial real estate credit offers a positive solution for investors who might be facing financial obligations or challenges. This asset class offers substantial variations in strategies, risk levels and the ability to invest across the capital structure, including both senior and junior positions. It also allows investors to tailor allocations that align with their long-term goals.

Pension funds, for example, typically seek low-risk credit funds that tend to lend against stable-yielding assets. These assets can generate cash flows that match required payments to their beneficiaries.

That said, not all investors are the same. Many have liabilities that are subject to cost-of-living adjustments that may result in higher payments when inflation rises. Traditional investment approaches typically use long-duration bonds to manage the long-duration liabilities.

During the recent market cycle, however, traditional approaches showed weakness as inflation and interest rates rose quickly. For instance, it is common practice to use swaps and other derivatives to replicate the bond positions necessary to hedge liabilities. As interest rates increased over the past two years, the values of these leveraged derivative positions declined, generating significant losses and creating a short-term liquidity crunch for investors who utilized substantial leverage.

Rethinking bond exposure

Historically speaking, if stocks go down, then bonds rally and investors seemingly always have a shock absorber in their portfolios. But this notion is changing.

Banks had more than $600 billion in unrealized losses at the end of 2022, according to the Federal Deposit Insurance Corp. The Federal Reserve, meanwhile, has about $1.1 trillion in unrealized losses in its System Open Market Account, with a large percentage of that total tied to U.S. Treasury bonds.

Therefore, every time there is a rally in bonds, what will the Fed do? Many believe they will sell, thus driving bond prices down. Moreover, Japan, which happens to be the largest foreign holder of U.S. bonds, is mimicking this playbook. These sales will eventually lead to an increased bond supply, along with investors such as banks and the Fed being underwater in their bond portfolios.

These conditions mean that investors need to think about how much they own in stocks and bonds, with a particular emphasis on the bond market. Alternative products such as commercial real estate credit can help them earn a bond-like yield without the same duration or volatility associated with traditional fixed-income products.

Finding yields

Private real estate credit vehicles that generate stable income while having some inflationary protection can help investors reduce surplus volatility. Investors can also earn higher yields to better achieve their capital-deployment goals with less complexity.

Furthermore, commercial real estate credit is attractive since it offers equity-like returns with lower levels of risk due to its seniority in the capital stack. Tighter capital standards, unrealized losses and higher loan-loss reserve requirements are forcing banks and other financial institutions to hold more capital and issue fewer loans, which is providing opportunities for nonbank lenders to fill the gap.

The multifamily housing sector is an excellent example of this trend in the commercial real estate market. There is a shortage of about 6.5 million single-family homes in the U.S. right now, a result of many factors that include a slowdown in construction dating back to the 2008 financial crisis. Even if multifamily rental units are included in this equation, there is still a deficit of about 2.3 million homes.

The lack of housing, coupled with the need for lenders to step up and fill the gap, provides an abundance of opportunity for well-capitalized nonbank lenders. They can deploy capital into high-quality loans at attractive spreads using relatively conservative underwriting metrics. Commercial real estate credit also offers a strong inflation linkage, produces recurring cash flows and helps to protect returns in a more volatile environment.

Having stable cash flow and the ability to grow income in today’s inflationary environment is highly attractive for investors. This cash-flow resiliency has been particularly true across sectors that private investors currently favor, such as built-to-rent homes and industrial warehouses.

● ● ●

The Federal Reserve appears to be putting a pause on interest rate hikes for the time being, but many experts believe that the commercial real estate market will deal with what is being described as a “higher-for-longer” rate environment than what was originally expected. In the past, the Fed, the European Central Bank and the Bank of Japan used quantitative easing as a road map to indicate their desire to be protective against elevated rates.

Today, they don’t have that visibility as wages, the transition to clean-energy sources, geopolitical concerns and other fiscal issues are all disruptive variables. One thing being learned in the U.S. is that there’s more money in the system than many people had expected. The consumer economy continues to show strength, the services economy is swelling and wage growth has been only nominally subdued. Fed policymakers may not be done with their job until they inhibit the growth of the labor force.

As a result, this higher-for-longer rate environment has created unparalleled opportunity for commercial real estate credit. By staying patient, disciplined and at the forefront of the market, private lenders are strategically positioned to be major players among the sources of mortgage capital and should therefore have a place in every investor’s portfolio. ●

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State and local HFAs support the purchase, development and rehabilitation of affordable homes and rental apartments for low- and moderate-income families. These agencies play a crucial role in providing affordable housing across the country. (And yes, HFA is not to be confused with FHA or Federal Housing Administration loans.)

“You or your company may have had a prior unsatisfactory experience in the HFA space. The good news is that time and technology have facilitated important progress.”

Not all housing finance agencies are alike. How they operate and function can vary widely. Typically, HFAs act as independent organizations overseen by a board of directors that’s appointed by an elected official. For state-level HFAs, the governor is usually the appointing authority.

You or your company may have had a prior unsatisfactory experience in the HFA space. The good news is that time and technology have facilitated important progress.

Shapes and sizes

Let’s begin by distinguishing HFA models. Some of these agencies operate as full-scale mortgage banking institutions with in-house loan origination, secondary marketing, servicing and other centralized business units required to conduct mortgage lending. A small number of HFAs are approved seller-servicers through Freddie Mac, Fannie Mae and Ginnie Mae. They do not rely on a lender as the master servicer.

Some HFAs are more focused on multifamily finance or niche products to serve their specific market. Some have a contractual partnership with a mortgage lender or another HFA to conduct some or all the activities required to manage a first-mortgage product offering and downpayment assistance. This partnership creates a master servicer that is the conduit to buy all of the loans originated through the HFA’s program by partner lenders.

You may know or already work with some of these institutions. For instance, U.S. Bank is a master servicer that works with more than 40 state and local HFAs across the country. HFAs with servicing capabilities include the Idaho Housing and Finance Association, as well as ServiSolutions, which is a division of the Alabama Housing Finance Authority. Lakeview Loan Servicing, one of the nation’s largest servicers, also works with multiple state HFAs.

To work with an HFA or its master servicer, an originating lender will need the systems and process support to sell whole loans and comply with the agency’s policies and procedures. Lenders will need to complete an application obtained from the HFA or its master servicer, in addition to paying an application review fee. In most cases, it is similar to being approved to deliver loans to a correspondent.

Questions will be asked about your company’s financial condition, production levels, quality control and appraisal process. Be prepared to provide information on any active legal actions, audit reports, resumes of key personnel, proof of insurance and other details. In addition, there may be less common requirements, such as actual office presence in a specific state.

Pots of money

Congress established the tax-exempt bond program in 1968 to fund affordable housing, allowing for the creation of many of the state housing finance agencies. This provided state HFAs with a vital funding source. Tax-exempt bond financing can produce below-market interest rates on 30-year fixed-rate mortgages for first-time homebuyers. This is especially important in a rising-rate environment like today’s.

In 2019, state HFAs financed more than 64,200 mortgages in the U.S. with these bond programs. These agencies also built or rehabilitated more than 46,200 affordable rental units through multifamily bonds. When Congress created the bond program, each state could issue these low-interest bonds up to a cap of $50 per state resident. Due to program effectiveness along with strong lobbying efforts, this limit has grown over the years to $120 per capita in 2023.

Some HFAs also rely on the to-be-announced (TBA) secondary market. The TBA market is a mechanism to obtain pricing for the future sale of securities and is a common form of mortgage-backed securities trading. HFAs can supplement their tax-exempt bond programs by leveraging this standard taxable source of funding.

In addition, many state and local agencies benefit from other federally funded programs. The Community Development Block Grant program received $3 billion in funding in 2023, while the Home Investment Partnerships Program was funded at $1.5 billion. These programs can pay for specific housing needs, such as downpayment assistance and home improvements.

Tax-exempt bond programs generally require additional documentation. Beyond credit qualification, the lender will need to provide documented proof of the borrower’s maximum household income and first-time homebuyer status. Therefore, if a lender is participating in a program that is funded by the sale of tax-exempt bonds, expect to see a loan delivery checklist that contains more documentation for each file.

One example is the need to ensure that a borrower signs the recapture notice. Borrowers may be subject to recapture — a tax to the federal government for the benefit of a lower-interest mortgage. Recapture tax is rarely sought but is required to be paid if all three of the following conditions occur: the home is sold within nine years of being purchased; the borrower’s income exceeds allowable limits at the time of sale; and the borrower profits from the sale.

Rolled-up sleeves

Downpayment assistance programs are an important tool to support first-time homebuyers and purchase-market production. More than ever, originators need to offer these programs. Even if a borrower is ultimately able to qualify without downpayment assistance, the originator has demonstrated their value and is likely to earn future referrals by having more ways to help the client qualify.

Many large banks have stopped participating in some or all state HFA programs. This is due to slim profit margins that don’t support the additional resources needed to ensure the quality of loans. Even the more nimble independent mortgage banks have been vocal in recent years about the lack of consistency in program guidelines, processing, required technology support or manual workarounds.

Anyone interested in expanding homeownership opportunities in underserved communities should applaud the government-sponsored enterprises (GSEs) and advocacy groups for their efforts to bring more consistency to downpayment assistance programs. In the past few years, there has been silent but impactful work to develop standard subordinate legal documents for these programs.

This will reduce the time and expertise needed by a lender to review documents and comply with GSE requirements for downpayment assistance. Docutech and DocMagic were part of the legal team that created these documents, which are now available for the 16 states that are currently using them as pilot participants.

Another advancement is the HFA1 tool that’s now available through the National Council of State Housing Agencies. This tool indicates the alignments and differences for programs offered by 23 state HFAs. Lenders will find details on mortgage and downpayment assistance qualification, closing, delivery and other instructions.

●●●

Despite the complexity of participating in dozens or hundreds of programs, it can be beneficial and lucrative for lenders and originators who can patiently put the required support in place and build a name for themselves as experts in the field. HFA websites will often post lists of their best lenders to refer potential homebuyers.

Real estate professionals who work in the first-time homebuyer market will look for an originator with the widest product menu and the ability to make deals work by explaining to the borrower how they might benefit from a subsidy for the downpayment or closing costs. These subsidies could feature deferred payments, payments forgiven over time or grants that will never need to be repaid. ●

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One reason for this is the homeownership gap between Black and white families, with homes accounting for so much personal wealth. The homeownership rate for Black families is about 45% compared to nearly 75% for white families.

“If the cost of compliance is too high, we are going to see banks cutting growth again to stay below that threshold.”

The National Association of Real Estate Brokers (NAREB), a network of Black real estate professionals, recently released its 10th annual State of Housing in Black America (SHIBA) report. NAREB president Courtney Rose Johnson spoke to Scotsman Guide about the report and her group’s Building Black Wealth Tour, which includes events in 100 cities on April 13 to highlight Black homeownership potential.

The Black homeownership rate reached nearly 50% before the Great Recession. Will it surpass this mark in the near future?

It’s definitely possible, but some things would have to change. First, we have a tremendous housing inventory shortage. Our ability to be able to place a buyer in a home that’s affordable is a challenge.Second, there’s a lot more education and financial literacy that has to happen. The SHIBA report has shown continuously that there are over 2 million potential Black mortgage-ready homebuyers. Why haven’t they purchased? Is it the downpayment? Is it that they don’t know that they’re mortgage ready?

Federal policies helped to create this situation and you’re calling for federal policies to fix it. What are you hoping happens?

We all know a lot of discrimination was basically policy driven. So, we’re asking, for example, for Fannie Mae and Freddie Mac to look at their pricing grids and move toward more accurate, up-to-date credit-score models. Using just one type of credit-score model is not necessarily advantageous for Black and brown borrowers. If you look at the average African American, the VantageScore versus FICO is usually higher because of some of the things that VantageScore uses.

There’s a lot of things that the federal government could do to increase housing stock. How are cities using their Community Development Block Grants? Can some of the regulations, zoning and building requirements in certain cities be made more flexible? A lot of things that can happen from the government side would make homeownership more achievable for us.

Are you surprised that housing is not more of a conversation in an election year?

Housing affects everybody. As the pricing goes up around the country, the conversation about affordable housing isn’t just about low- to moderate-income families. I like to use the phrase “workforce housing,” meaning somebody that goes to work every day — teachers, firefighters, police officers, etc. — being able to buy housing in their price range. Housing production, interest rates, all these things are not just affecting Black and brown communities but affecting all of the communities out there.

Another worrisome issue is the number of homes purchased by Black borrowers that are vulnerable to climate change, right?

This is our second year in a row bringing this issue up. There’s a map in the report that shows the Black population in the country is in more highly populated areas in the South, Northeast, etc. Those same areas fall along the coastline, areas more susceptible to flooding and things of that nature. So, it’s something we are very conscious of as we push to increase homeownership. We’re also focused on home preservation, setting up Black homeowners in situations where they can sustain themselves as global warming and environmental challenges increase.

What are you hopeful for in the future?

We have launched the NAREB Building Black Wealth Tour as a response to the State of Housing in Black America. We’ve also launched the NAREB Black Developers Academy to help our members that are real estate developers scale and increase their production to be able to help with the housing shortage. We’re excited that Black consumers are coming out to get the information to figure out how they can become homeowners. ●

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The benchmark rate remains at its highest point in more than two decades, but with inflation cooling, the Federal Reserve has eased off its hawkish pattern of late. The statement released after Wednesday’s meeting of the central bank’s Federal Open Market Committee (FOMC), which sets national monetary policy, said as much, noting that “risks to achieving [the FOMC’s] employment and inflation goals are moving into better balance.” The FOMC also replaced a sentence regarding “the extent of any additional policy firming that may be appropriate,” adopting a more moderate tone in saying it will be data-driven in “considering any adjustments to the target range for the federal funds rate.”

The Federal Reserve also indicated that several cuts later in the year are likely, offering optimism to a housing industry battered by the elevated rate environment — although Fed chair Jerome Powell was swift to throw cold water on any inkling that cuts may be in the cards by the next FOMC meeting.

“Based on the meeting today, I would tell you that I don’t think it’s likely that the committee will reach a level of confidence [to lower rates] by the time of the March meeting, to identify March as the time to do that,” he said at the customary post-meeting press conference after being asked if he foresaw rates being reduced in the near term.

“But that’s to be seen. … When you ask me about ‘in the near term,’ I’m hearing that as March and that’s probably not the most likely case or what we would call the base case,” Powell said.

The decision to stand pat may relieve much criticism of the Reserve for now, considering how much vitriol the Fed stirred up over months of near-constant interest rate increases. Marty Green, principal at mortgage law firm Polunsky Beitel Green, posited that clamor for a lowering cycle may heat up soon to maintain a strong economy.

“Like a pilot landing a plane in the fog, the Federal Reserve is being very patient and deliberate before taking additional action to reduce interest rates,” he said. “As long as the economy remains relatively strong and inflation continues to moderate, as it has in recent months, the Fed can circle the runway for another meeting cycle or two before trying to navigate the soft landing it has hoped for.

“But the American consumer, who has been bolstering the economy so far, may very well be running on fumes at this point, and some interest rate relief in the coming months will likely be necessary for the economy to maintain a healthy growth pace.”

Powell, for his part, was resolute as ever in the Federal Reserve’s wait-and-see stance, repeating that “we think we have a ways to go” before the Fed’s target inflation range of 2% is reached. He acknowledged that interest-sensitive parts of the economy, such as housing, have seen outsized impacts from Fed policy. Still, asked about a recent letter sent to the Fed by some members of Congress to make housing more affordable, Powell, like Green, invoked the well-being of the American consumer, but in defense of staying the course.

“The job Congress has given us is price stability and maximum employment. Price stability is absolutely essential for people’s lives, mostly for people at the lower end of the income spectrum who are living at the edges, at the margins,” Powell said. “For someone like that, high inflation in the necessities of life, you’re in trouble, whereas even middle-class people have some scope to absorb higher costs. It’s our job. It’s what society’s asked us to do, is to do get inflation down, and the tools that we use to do it are interest rates.”

That hasn’t stopped many stakeholders, especially within the mortgage industry, to point out that calls for rate relaxation will only grow as the months go on. Rich Traub, partner at commercial real estate law firm Smith, Gambrell & Russell, called the Fed meeting result “a mixed bag” and noted that the “messaging on rate cuts was less than enthusiastic or promising.” Max Slyusarchuk, CEO of A&D Mortgage, said that “markets had already priced in a ‘no change’ from the Fed, but political pressure is mounting on the Federal Reserve to cut rates sooner rather than later.”

“All in all, for the real estate market, I don’t think today’s pronouncements move the market one way or the other,” Traub said. “I still see the market involved in a waiting game, and one that may take longer to play out than what is needed to jumpstart the marketplace.”

So when can the lending sector finally expect a rate cut?

“Unless [FOMC members] bend, we believe rates will begin to start to slowly pull back in the second half of this year, with many economists predicting a mortgage-positive outcome from the May meeting,” Slyusarchuk said.

As for the magnitude of an eventual lowering cycle, Lawrence Yun, chief economist at the National Association of Realtors, reminded the real estate industry not to expect too much easing, but remained confident that an eventual cut will have a meaningful effect.

“Let’s recall that before the COVID-induced economic lockdown, the Fed funds rate was near 2%, and the 30-year fixed mortgage rates were at nearly 4%,” Yun said. “We will not return to this level this year or next year. The budget deficit remains high, and the various inflation metrics remain above the comfort level. That means the mortgage rates will likely be in the 6% to 7% range for most of the year.

“This current rate is lower compared to the high of 8% a few months ago, which is helping to improve housing affordability. More homebuyers will return to the market. Many delayed home sellers may be willing to give up 3%-4% rates as life circumstances have changed, thereby boosting inventory. Home sales will no doubt rise this year.”

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The benchmark rate remains at a 22-year high as the Fed continues to wrangle with pulling persistent inflation back down to a 2% target range. But it’s the third consecutive meeting in which the Fed has decided not to raise the rate further, a marked shift after more than a year of aggressive hikes.

Several economic indicators released during the leadup to the meeting of the central bank’s Federal Open Market Committee (FOMC) essentially telegraphed the Fed’s decision, including a Consumer Price Index (CPI) report earlier in the week that showed overall inflation up 3.1% year over year in November. That’s down from 3.2% in October and a vast reduction from the peak above 9% in summer 2022.

Meanwhile, the employment market has continued to moderate and the economy at large has shown signs of cooling after a third quarter that saw annualized gross domestic product growth of 5.2%. The statement released after the FOMC meeting acknowledged as much, with changed verbiage referring to the economy’s strong pace in the third quarter also noting that growth since then has slowed. The Fed also added language to the statement recognizing that, while inflation remains elevated, it has eased over the past year.

Also interesting was a curious one-word addition to the statement.

“In determining the extent of any additional policy firming that may be appropriate to return inflation to 2% over time, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” the Fed stated. In its previous statement, that sentence appeared identically, save for the word “any.”

It’s a small change that’s likely to be music to the ears of Fed watchers across the mortgage lending and real estate industries.

“We added the word ‘any’ to acknowledge that we are likely at or near the peak rate for this cycle,” Fed Chair Jerome Powell said at the customary press conference after the FOMC’s meeting. “[Meeting] participants didn’t write down additional hikes that we believe are likely, so that’s why we wrote that down. But participants also didn’t want to take the possibility of additional hikes off the table, so that’s really what we were thinking.”

Powell’s overt comment that the peak rate has likely been reached is the first such sign from the Fed and an early Christmas present for the battered housing sector.

“Mortgage markets should be pleased that Jerome Powell acknowledged that the Fed is at or near the end of rate increases for this tightening cycle,” said Marty Green, principal at mortgage law firm Polunsky Beitel Green. “While not completely removing the possibility of a rate increase in 2024, the changes in the policy statement made clear that this bullet appears to be kept in the Fed’s holster rather than in its gun ready to fire.”

Powell also said that the Fed doesn’t believe a big downturn is in the cards, although he didn’t altogether dismiss the possibility.

“I have always felt since the beginning that there was a possibility, because of the unusual situation, that the economy could cool off in a way that would enable inflation to come down without the kind of job losses that have often been associated with high inflation and tightening cycles,” he said. “So far, that’s what we’re seeing. That’s what many forecasters on and off the committee are seeing.

“This result is not guaranteed. It is far too early to declare victory, and there are certainly risks. It’s certainly possible that the economy will behave in an unexpected way. It’s done that repeatedly in the post-pandemic period. Nonetheless, where we are is we see [economic cooling without widespread job losses].”

Selma Hepp, chief economist at CoreLogic, foresees the beginning of normalization.

“The Federal Reserve’s decision today marks two important milestones. The first is that the Fed confirms that it believes its actions helped tame inflation while also preventing the economy from slipping into recession,” Hepp said. “The second is that housing can begin the slow process of returning to a more normalized rate environment. However, we expect it will be several months before housing returns to smoother sailing and there may yet be some choppy waters ahead.”

Max Slyusarchuk, CEO of A&D Mortgage, agreed about the direction of the rate curve, projecting the slow decline of interest rates through 2024. Like Hepp, he also cautioned that stakeholders, especially homebuyers, shouldn’t expect immediate rewards.

“We don’t expect rates to fall that much in this period and it may not offset rising home prices in hot housing markets,” Slyusarchuk said. “So, homebuyers who wait on the sidelines for better rates next year may find the waiting game didn’t pay the dividends they expected.”

Homeowners who recently bought properties, however, could reap major benefits if rates fall far enough below those of their current loans.

“Since January 2021, there have been 3 million new mortgages originated with interest rates of 6% of higher, the total balance of which being over $1 trillion,” noted Michelle Raneri, vice president of U.S. research and consulting at TransUnion. “The monthly payments of each of these high-interest mortgages averages $2,201.

“If interest rates dropped to even 5.5%, it could result in significant savings for these homeowners, as refinancing at that rate could result in an average monthly payment of $1,917 for them, a reduction of $284 every month. This would represent nearly $300 a month that these homeowners would be able to use elsewhere in this continued high cost-of-living environment in which every dollar counts.”

With hand-wringing over further rate increases now apparently in the rearview mirror, speculation now pivots toward how far and how fast rates could start decreasing.

“The pace of rate reductions in 2024 is now the focus as inflation concerns continue to fade,” Green said. “While nobody in the mortgage world would say, ‘Tis the season the season to be jolly,’ based on current market conditions, the Fed’s outlook at its December meeting points to an increased possibility of a happier new year.”

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In Episode 023 of the Scotsman Guide Author Showcase, Carl White interviews Rebecca Richardson of Kind Lending about her article, “Path of Progress,” in the December 2023 issue of Scotsman Guide Residential Edition.

Rebecca Richardson is a Charlotte-based originator for Kind Lending. She is popularly known as “The Mortgage Mentor” and is a seasoned loan officer with 20-plus years of experience. She has a strong passion for helping individuals achieve their dreams of homeownership. As a social media influencer and industry thought leader, Richardson uses her platform to educate and empower others.

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There is no end to the projects underway, including an ongoing adaptive-reuse plan for Los Angeles, which has been active since 1999, mostly in the city’s downtown core. In the first 15 years of the program, more than 12,000 housing units were developed, many in converted bank buildings. This year, planners have decided to expand the program citywide.

“We are in the Wild West with these projects, and developers like predictability and certainty in what they do.”

– Brooks Howell, residential leader and principal, Gensler

In Chicago, former mayor Lori Lightfoot is championing the LaSalle Street corridor revitalization, a massive $1 billion project that will repurpose 2.3 million square feet of vacant space in the city’s famed central business district into 1,600 mixed-income apartments. New York City also has a conversion program in place, but officials this year proposed state and city zoning changes that would extend flexible conversion regulations to an additional 136 million square feet of office space.

Many academic groups and private research firms are joining up with the adaptive-reuse movement. Many believe this process is a partial answer to the nation’s housing problem. A 2022 Rand Corp. report, for instance, identified 2,300 commercial properties in the Los Angeles area that, if fully utilized for residential purposes, could produce between 72,000 and 113,000 apartments, depending on the mix of unit sizes. This would equate to 9% to 14% of the housing units that Los Angeles County will need to produce by 2030. The report found that adaptive-reuse projects to convert hotel and motel rooms into studio apartments is typically a lower-risk proposition than converting office and retail spaces.

For all the excitement about such projects, however, there isn’t as much activity happening as one might expect. CBRE found that an average of 41 office conversions were completed annually between 2016 and 2022. The real estate services company estimates that the number of projects is expected to double, due to increased incentives and other help from state and local governments.

There are many difficulties for these projects to overcome, but the one aspect that may be insurmountable for many buildings is that the projects don’t tend to pencil out. Most office building conversions are too expensive to make the process financially feasible.

“There’s a lot of ink being spilled on this subject right now,” says Brooks Howell, residential leader and principal at Gensler, a global architecture, design and planning firm. “But the biggest challenge is the major cost mismatch. These buildings are going to have to sell really, really cheaply to make conversions work.”

Howell points to many parts of the building that can be problematic, including the size of the property. The sweet spot for most apartment buildings is about 350,000 square feet, which allows for the greatest efficiency in using all of the space. Larger buildings often need to be mixed-use projects with some floors remaining as office space. This is a problem because, under current circumstances, the office space may not have tenants and would essentially be unused, reducing the value of the building.

But there are many other problems with conversions, from replacing the skin of the structure, to putting in windows that open or adding balconies, which endanger the integrity of the facade. Other than the building itself, there are a variety of zoning regulations that vary from city to city which can upend a project.

There are also mechanical issues. Howell says that some of the reasons that office-to-apartment conversions are so expensive aren’t always the obvious ones. For example, it’s common to single out plumbing and other infrastructure aspects needed for apartments. Howell maintains that plumbing is a set cost and not as much of a problem as the building’s mechanical systems, including heating and air conditioning, which may cost tens of thousands of dollars per apartment unit if upgrades are needed.

“We are in the Wild West with these projects, and developers like predictability and certainty in what they do,” Howell says. “And you’ve introduced more unpredictability and uncertainty in this process. Not a lot of developers are comfortable with that, and I think that’s really what’s slowing the process.”

Due to the added costs, Howell maintains that most, if not all, of the buildings currently being converted are receiving some form of tax credits, usually because the properties are considered historic. It’s the only way for the numbers to make sense. He believes that for more conversions to work, it will require a coordinated effort by federal, state and local governments to develop tax breaks and other forms of financial incentives.

“The federal government is going to have to come up with some plan that allows this process to move quicker,” Howell says. “I’d love to see them step in and incentivize the conversion process. There are many reasons for it, including the fact that converting buildings is the most carbon-neutral way to build housing.

“The question is, how do we overcome all the different roadblocks? There is no coordinated and concerted effort to solve these problems, and there’s not one entity that seems to be in control.” ●

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In October of next year, the Equal Credit Opportunity Act of 1974 will mark its 50th anniversary. This landmark legislation prohibits lenders from discriminating against a borrower on the basis of gender or marital status, and it was amended in 1976 to protect against other forms of discrimination, including race, age and religion.

“Mortgage professionals, as the face of the business, have a responsibility to champion equal access and financial literacy.”

The impact of the ECOA is evident today. Single women now outnumber single men as homebuyers. Women are earning more bachelor’s degrees than men and their average credit scores are identical. But obstacles still exist as women face pay gaps, sexism, harassment and a gender gap in financial literacy.

As women have evolved from second-class citizens to breadwinners, the mortgage industry also needs to evolve to serve and educate them with safety and respect. Mortgage professionals, as the face of the business, have a responsibility to champion equal access and financial literacy.

Financial history

In 1853, suffragist Susan B. Anthony wrote that a “woman must have a purse of her own, & how can this be, so long as the wife is denied the right to her individual and joint earnings.” By 1890, 20% of women were wage earners. And by 1900, all states had passed laws allowing married women to retain ownership of property and real estate.

This allowed them some control over their wages, but banking services were nearly impossible to access. A few banks ran so-called “ladies’ departments,” and in 1919, the First Woman’s Bank opened in Tennessee. Still, these services were available almost exclusively to upper-class white women, and it wasn’t until the 1960s that women were given legal access to banking products.

Hurdles continued. Even with legal access to bank accounts, lines of credit and loans, most institutions still required a male co-signer. This largely prevented independent women — single, divorced or widowed — from participating.

The 1970s were a turning point for women’s rights, including financial rights. In 1971, the Supreme Court unanimously ruled that “dissimilar treatment on the basis of sex” between men and women was unconstitutional. Amendments to the Civil Rights Act protected women from discrimination in hiring and firing. And in 1974, the ECOA was passed, barring lenders from requiring a male co-signer and limiting them to only consider creditworthiness when reviewing applications.

Financial literacy

To take advantage of access to financial products, including mortgages, clients must be educated about them. A TIAA Institute study found that women lag behind men in financial literacy while Black and Hispanic women lag behind their white peers. The study also found that financial wellness was higher among those with higher financial literacy — meaning that the more educated you are, the more creditworthy you’ll be.

Picture a divorced woman in the rapidly changing world of the 1970s and ‘80s. Most of her adult life was spent sharing finances with her husband, who had control of the accounts. She now has to figure out how to support herself for the first time, and despite the pain and hardship she experienced in her marriage, she asks her ex-husband for an alimony increase because she needs money.

 You might be confused by this approach. Why would she ask her ex-husband for money when she could start working or reach out to family for support? This woman had the means to overcome any financial hurdles she faced. The problem was, she didn’t know her options, and she was frozen in a certain mindset — almost as if financial independence wasn’t even an option to consider.

This perspective likely sounds foreign to a mortgage professional with extensive financial education, but it was a reality for millions of women, for many years. Women today make more money than ever, but they still earn less than men. They have improved their financial literacy, but that isn’t equal either. Mortgage originators can help bridge this gap so that women can take control of their financial destiny through education.

Response to misogyny

Recently, a video was posted to Instagram discussing the profound changes that occurred due to the passage of the ECOA. The video highlighted the liberation women experienced when they were no longer required to have a male co-signer for a credit card and mentioned the increase in single female homebuyers.

Responses to the video were far from expected. The comments section hosted an onslaught of derogatory remarks, rife with misogyny and offensive generalizations about women’s spending habits and financial means.

Women thriving in male-dominated industries are not strangers to what some consider socially acceptable misogyny. This manifests in meetings where men heavily outnumber women, with vague innuendos and/or outright sexist comments. It’s expected and tolerated, so women go into these situations prepared. The initial approach is observation — to look for contextual clues of who will regard them as an equal and who might not. Then they handle conversations accordingly and move on.

“When driven by a clear vision and purpose, external criticism loses its power. Focus on the betterment of your community.”

Although women often possess the resilience to handle such situations in a professional setting, more direct online vitriol — like the comments on that video — are not only personally hurtful but also a stark reminder of the misogyny still present in some circles. A woman not normally exposed to such toxicity may not be prepared to combat it. But she certainly would not want to perpetuate it either. Her first reaction might be to close the comments or take down the video altogether.

But she should not let this undermine the video’s message or erase positive responses to it. The video was a worthy history lesson highlighting the importance of financial equality. It was intended as encouragement to other women and its message shouldn’t be silenced by anonymous bullies. The creator left the video up, and decided to rebuke and refute. The disgusting comments finally stopped and the supportive ones started showing up. This reaffirmed the importance of the video’s message: advocate for financial equality and challenge stereotypes.

This experience is not unique: According to the Pew Research Center, 41% of Americans have experienced online harassment. Sixty-one percent of women polled thought it was a major problem, with 48% of men in agreement. Social media platforms have even been called out by international governmental organizations as a “conveyers of sexist hate speech.”

If this can affect something as simple as a financial education video, it should serve as a call to action for mortgage professionals who don’t conform to dated gender norms. You are a front-line resource for equal access, education and financial literacy.

What’s next?

Although many originators serve a diverse clientele, female clients appreciate working with someone who understands their unique challenges. In a 2013 Insured Retirement Institute study, 70% of women said they prefer to work with a female financial adviser.

A 2022 survey by Edelman Financial Engines shed more light on this statistic. In the Edelman study, 82% of people said they prefer to work with a financial adviser who shares a common background or beliefs. Women want to work with women because they feel safer. They aren’t placed in yet another situation where time and energy are spent deciding whether a person’s smile is genuine, or if it’s hiding opinions like those in the Instagram comments section.

Women are mothers, sisters, wives, daughters and friends. They make up roughly half of every community, they are breadwinners, and they deserve the same rights and privileges as men. Any mortgage originator can make their business a safe and comfortable place for women by actively advocating for them. Explore your own biases and thoroughly educate your female clientele to help them get approved. Ally yourself professionally with women’s groups, or host workshops for young, single people of all genders.

Many originators already contribute to this transformation by sharing their knowledge on platforms like social media. As your influence grows, however, so may the backlash from those invested in maintaining the status quo. Standing out invites scrutiny and attempts to diminish your voice, but you cannot be silenced.

When driven by a clear vision and purpose, external criticism loses its power. Focus on the betterment of your community. Your voice matters and your community needs your insights. By embracing authenticity and refusing to conform, you ensure that your message of financial empowerment reaches those who truly need it.

Resist the urge to shrink back. You deserve to be heard and your community needs to hear what you have to say. The journey to financial equality continues and you, as financial professionals, must not let bullies deter you from the path of progress. ●

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The move (or lack thereof) keeps the target range for the Fed’s benchmark rate at 5.25% to 5.50%. The rate remains at its highest level in more than two decades, but the decision to extend the pause nonetheless triggers a sigh of relief from the still-flagging mortgage and real estate industries, which have seen home sales decimated by the high interest rate environment.

Last month, Lawrence Yun, chief economist for the National Association of Realtors, said that “the Federal Reserve simply cannot keep raising interest rates in light of softening inflation and weakening job gains,” citing existing home sales that had plunged to their lowest levels in 13 years.

All 12 members of the Fed’s policy-setting Federal Open Market Committee (FOMC) voted to hold interest rates steady.

A consensus among observers has been that the Fed will continue to sit back and monitor the impacts of its proactive monetary policy as it ripples through the economy, which has remained remarkably resilient despite the Fed raising interest rates 11 times since March 2022. Consumer spending has persistently outperformed expectations, ending the third quarter with an 0.7% surge in September, while real gross domestic product grew at an outsized annual rate of 4.9% from July through September.

In its newest statement, the Fed acknowledged that the economy is still exceeding expectations, comments that were similar to the ones released after the FOMC meeting in September. One of the few changes the Fed made in the statement was to upgrade its verbiage from “solid” to “strong” when referring to third-quarter economic activity.

Federal Reserve Chair Jerome Powell nodded to still-strong economic conditions in his post-meeting press conference. He also pointed out areas of progress for the economic tempering needed to bring inflation back to the Fed’s 2% target range. Nominal wage growth has shown some signs of easing, Powell noted, while hiring has declined “somewhat” and has helped lead to favorable inflation readings since the summer.

But “a few months of good data are only the beginning,” he said. Powell described inflationary pressures as “well anchored,” and he matter-of-factly added that “the process of getting inflation sustainably down to 2% has a long way to go.”

Core inflation, according to the U.S. Department of Labor Statistics, currently stands at 4.1% annually, a substantial decrease from its 6.6% peak last year but still well short of the Fed’s 2% target.

As he has during the past few post-meeting press conferences, Powell was swift to note the hardships imposed by the Fed’s aggressive interest rate policy on consumers’ wallets, as well as to rate-sensitive sectors like real estate. But he repeatedly went back to the familiar refrain of the second prong of the Fed’s dual mandate: price stability.

“In light of the uncertainties and risks, and how far we have come, the committee is proceeding carefully,” Powell said. “We will continue to make our decisions meeting by meeting based on the totality of the incoming data, and their implications for the outlook and for economic activity and inflation, as well as the balance of risks.”

He stressed that the FOMC hasn’t yet made any interest rate decisions for its December meeting, nor is it currently considering lowering rates.

Reacting to the Fed’s decision, Marty Green, principal at Texas mortgage law firm Polunsky Beitel Green, likened the central bank to “a blackjack player with two face cards.”

“The only sensible play at this meeting was to hold pat,” Green said. “Since the last meeting, the markets have basically done the Fed’s work for them, with the rise in rates for Treasurys and mortgages equating to another interest rate increase. The lag effect of the Fed’s policy decision was on full display, with the economy continuing to absorb the full impact of the Fed’s decisions from earlier in the year, even with the Fed taking no additional action.”

Green believes it’s “increasingly clear that the Fed is indeed done raising rates in this cycle.” Asked before the FOMC meeting whether he sees another rate increase in the pipeline, he reiterated that market forces are already doing the Fed’s work for them.

“I think they’re actually at their terminal rate already,” Green said. “I don’t think they’re going to raise rates any further. One of the reasons they’re able to probably do that is mortgage rates and other rates have been elevated. That makes it less necessary for them to raise rates to get them a little higher. 

“At this point, if you really look at it, the Fed raising rates another quarter of a point is not going to matter much at the end of the day. I think they want the market to think they’re prepared to raise them additionally if they need to, but I don’t see them doing it.”

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First enacted in 1977, the CRA is a federal law aimed at encouraging banks to meet the needs of a full spectrum of borrowers, including those in low- and moderate-income areas. Among other things, the act, originally passed to curb discriminatory lending and redlining, mandated that institutions insured by the Federal Deposit Insurance Corp. (FDIC) receive evaluations from federal regulators on whether they offer nondiscriminatory credit services in all communities where they do business. Unsatisfactory evaluations may cause lenders to receive a poor CRA rating, which could bar them from certain corporate activities, including mergers and acquisitions.

The CRA currently defines the area in which banks do business via their physical footprint, taking into account the locations of branches and deposit-taking facilities. But with the rise of online and mobile banking (and the dwindling use of physical depositories), the Federal Reserve Board, the FDIC and the Office of the Comptroller of the Currency sought to update that definition, initiating the reform proposal last year.

The new rule, which is set to take effect in January 2026, will extend the evaluation areas where lenders have concentrations of mortgages and small-business loans, which will be labeled as “Retail Lending Assessment Areas.”

That’s the biggest change in the new framework, and it’s a potentially seismic shift. Banks and industry groups spoke out against when it was first proposed, arguing that it could cause institutions to avoid lending in low-income or lightly populated areas to dodge wider assessment zones.

But David M. Dworkin, president and CEO of the National Housing Conference, applauded the shift.

“I haven’t been into a physical bank branch in years, but I visit my bank’s app on my mobile phone every week to make deposits or withdrawals,” Dworkin said. “The original statute in 1977 doesn’t require that branches be constructed out of bricks and steel. Branches today are often constructed out of ‘0s and 1s’ instead but serve the same purpose. My app is my branch, and the final regulation acknowledges this transformation, aligning the CRA with the 21st century.”

Dworkin called the regulation “the result of more than a decade of consultations with community and banking groups and years of work by regulators to get it right.”

“They got it right,” Dworkin quipped. “While not everyone is going to like everything in the final rule, it succeeds in significantly improving the status quo, and leaves room for ongoing clarification and adjustment over a 24-month implementation period [before the final rule is officially enacted in 2026].”

Other reforms in the new framework include tiered evaluation standards based on bank size; upgraded support to institutions geared toward minority lending and community development; and greater transparency and clearer metrics in the application of CRA regulations.

“To help ensure that the CRA can continue to play its vital role in supporting economic opportunity in low- and moderate-income and other underserved communities, the agencies have worked together to modernize the framework and I am pleased that those efforts have culminated today,” Federal Reserve Chair Jerome Powell said in a prepared statement.

“The final rule will better achieve the purposes of the law by encouraging banks to expand access to credit, investment, and banking services in low- and moderate-income communities; adapting to changes in the banking industry, such as mobile and online banking; providing greater clarity and consistency in the application of the CRA regulations; and tailoring to bank size and type.”

Rob Nichols, president of the American Banking Association (ABA), also released a statement. He praised the intent of the new rule while reserving judgment on whether his organization agrees on its implementation.

“ABA and our members have long supported the goals of the Community Reinvestment Act to make sure people in every corner of the country have the chance to succeed,” Nichols said. “In demonstration of that commitment, banks of all sizes invested $287 billion in capital in low- and moderate-income areas in 2021 alone. We have also strongly supported modernizing the Community Reinvestment Act rules to reflect the realities of modern-day banking. The test for a CRA modernization rule is whether it incentivizes investment in underserved communities with requirements that are transparent, promote consistency and align with Congressional intent.

“We are still reviewing the nearly 1,500-page final rule released today, including changes from the proposed rule, to assess whether it meets our criteria. We are also closely examining whether the final rule can be reconciled with other major regulatory changes in play, including the Basel III capital proposal. Feedback from our members will guide us moving forward.”

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