From big mortgage chill to big mortgage meltdown
It’s only February, but the mortgage regulations are going from chilly straight to meltdown, and the temperature has barely broken 75.
In November I wrote a column broadly outlining anticipated changes in Fannie Mae and Freddie Mac’s mortgage guidelines. At that time, Fannie and Freddie had just announced plans to expand credit to borrowers with weak credit and low down payment funds. These changes were a response to the slow growth in the housing market, as well as pressure from organizations like the National Low Income Housing Coalition to make mortgage funding available to a broader range of buyers.
Since then, Mel Watts, with the Federal Housing Finance Agency that oversees Fannie Mae and Freddie Mac, testified before the House Financial Services Committee outlining new guidelines effective at the end of March. He stated they expect to raise the guarantee fee charged lenders to back loans designed to cover the credit risk on loans guaranteed by the federal mortgage agencies. Presumably, they are anticipating that there will be more mortgage loans available in the future that will have additional risk attached to them.
Two significant changes were made by Fannie Mae and Freddie Mac, which supports the assumption that riskier loans are forthcoming. In December, Fannie Mae re-launched the 30-year, fixed-rate mortgage offering a 97 percent loan-to-value loan requiring only 3 percent down. This type of loan was suspended in 2013 by request of the federal regulators as a response to both Fannie Mae and Freddie Mac going bankrupt after the housing meltdown and having to be bailed out by the taxpayers.
In addition, in early January the president announced that the Federal Housing Administration will begin lowering annual mortgage insurance premiums to make mortgages more affordable and accessible. This means that mortgage insurance, which was generally required on high loan to value mortgages, will be reduced allowing more moderate and low income families to qualify for financing. Great idea in theory, but what this does is sets up these marginal buyers for failure when they can’t meet their monthly payments if they experience even a minor financial setback.
At the risk of sounding like a broken record, this is exactly what happened when the bubble broke. In fact in 2011, the Securities and Exchange Commission brought civil lawsuits against six former Fannie Mae and Freddie Mac executives charging they defrauded investors. The charge specified that they knew and approved of misleading statements about Fannie Mae and Freddie Mac’s exposure to subprime loans, loans that they “encouraged” private lenders to make. The most recent information I could find on the status of this lawsuit was from 2013, when the courts ruled against the executives who were attempting to have the lawsuits dismissed.
Just as a point of information, homeowner rates have actually fallen to their lowest level in 20 years. As of the fourth quarter of 2014, the rate was 63.9 percent, a rate last recorded in 1994. The rate at the end of 2013 was 65.1 percent. I believe that a falling homeownership rate has more to do with a sluggish economy than tight mortgage regulations. Opening up mortgages to buyers who really can’t afford it will lead to another financial crisis that the American people will again be bailing out.
So there you have it. We’ve gone from feeling a little chilly to full blown meltdown, and no one in Washington seems to be feeling the heat.