GOOD NEWS OR MORE HYPE?
One outcome of the 2007-2010 housing market meltdown was that people, especially those with less wealth, found it more difficult to buy homes.
With high unemployment (now dropping), flat incomes, and the requirement to put 20 percent down on a loan, homeownership had become an unattainable goal for many.
At a recent meeting of the Mortgage Bankers Association, Fannie Mace CEO Timothy Mayopoulos says that Fannie will support banks that take as little as a 3% down payment on loans, and that they will buy mortgages from them that are written on those terms. Where Fannie goes, Freddie Mac follows, which means that banks will enjoy relaxed terms for selling loans back to the federal agencies charged with buying them and providing stability in housing markets.
Mel Watt, the former North Carolina Congressman, now leads the Federal Housing Finance Authority. He says FHFA, which regulates Fannie Mae and Freddie Mac, will work with those agencies to ensure that they develop guidelines for the 3 percent loans. The goal is to increase access to loans for “credit-worthy but lower wealth borrowers”. HUD Secretary Julian Castro joined Watt at the Mortgage Bankers Association meeting supporting the ways that federal agencies can support more flexible mortgage standards.
Here is the flexibility, who will gain from it, and who will require banks to follow up? As somebody’s grandma (probably mine) used to say, you can lead a horse to water, but you can’t make him drink. Meaning, you can make things as easy for banks as you want to, but there is no guarantee that the banks will take advantage of those conditions.
Come on, now. The bank bailout of 2008 was engineered to make it easier for banks to put money into the economy. They were subsidized, and they were supposed to use their subsidies to lend to people who wanted to buy homes, start businesses, or take advantage of falling interest rates. Instead, they tightened credit standards, requiring a credit score of 720 when 680 might have sufficed a few years ago. Too many banks classically grab at subsidies without thinking they need to do something in return.
Too many have celebrated the headlines without reading the fine print. The fact that Fannie and Freddie have said they’ll buy low down payment loans does not mean that they have relaxed lending standards. Indeed, until the details have been spelled out, the new standards may mean little more than a token nod to the fact that homeownership is a key engine to economic growth. Tightening lending standards often leaves out those who could make it on the margin – the self-employed who never missed a mortgage payment but manage the fluctuations of income that reflect market conditions; the high wealth individuals with low credit scores because they have been careless with their credit. Congressman Watt says he wants to look at the “compensating factors” other than income and assets, to offer increased possibilities for borrowing. The guidelines have not yet been developed, which suggests the celebratory headlines may be preliminary.
For millions of folks the goal was not to find new loans but to simply save the ones they had, or still struggle to manage. As housing values dropped many found themselves “underwater” when the value of the loans exceeded the value of their homes. While federal policy allowed many of these homeowners to renegotiate the terms of their loan, too many bankers refused to. Now, federal financers are saying that banks can loosen the terms for borrowers without looking back at the ones they left behind. It seems to me that the Mortgage Bankers Association might be directed to look backward before moving forward. It seems to me that before writing low-down payment loans they may want to negotiate the folks they left holding underwater bag. The headlines about relaxed loan terms seem like a move in the right direction, but only if you ignore the fork in the road.
This has special implications for moderate and middle-income consumers and especially for African Americans. Most wealth is accumulated as home values appreciate, and fewer than half (and 70 percent of whites) use their homes to build wealth. Too many African Americans were at the periphery of our economy before the Great Recession, marginalized by underwater mortgages, and now ostracized by new developments that they will not be able to experience. There is no public policy to close the income gap, the wealth gap, or the homeownership gap. There are possibilities – Congressman Watt can push for special initiatives to include the least and left out in this wealth accumulation process.
While the Federal Housing Finance Authority, Fannie Mae, Freddie Mac and even the Department of Housing and Urban Development say they are making it easier for those with good credit and less wealth to enter the mortgage market, banks are going to do what they want to do. The headlines may not be good news, but just another change to “wait and see” who can build wealth in this much-touted economic recovery.