When the government created Fannie Mae and Freddie Mac, the intent behind these government-sponsored enterprises (GSE) was to make home ownership a possibility for more Americans. Fannie Mae states on its website the objective to “serve the need for liquidity, stability and affordability in the U.S. mortgage finance market. Despite it critics and some bookkeeping issues, the GSEs did a decent job of helping to turn the real estate industry into one of the most robust sectors of the economy.
Deregulation and nonexistent oversight of the financial markets have combined to send the backbone of the economy – the housing and mortgage markets, reeling into a downward spiral in 2008. Today, the markets still struggle to recover.
Government Efforts since the Housing Crash
Uncle Sam stimulated the market for a short period with over $16 billion for the First-Time Home Buyer Tax Credit Program, which ran from 2009 to 2010. After the program ended, despite historic lows in real estate and declining home prices, the market virtually came to a standstill within three months. Even the Feds purchase of $1.25 trillion in mortgage bonds, designed to keep low mortgage interest rates, failed to generate home sales.
Even with these efforts, the White House and Congress receive an “F” grade on their report card on three key factors: mortgage modifications, foreclosure resolution and repairing the stimulating the real estate sector.
Tightening the Standards
Fannie and Freddie determine the qualifications for mortgages; lenders dance to their tune because the GSEs insure and buy the loans. The GSE then securitize the loans into mortgage bonds. Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) guarantee about 90 percent of the loans.
Since the government took over the GSEs in 2008, Fannie and Freddie have systematically raising the underwriting standards for more than 12 criterions, including down payment, credit score and income qualifications.
According the Mortgage Bankers Association (MBA), borrowers received mortgage loans of $473 billion in 2010; MBA expects the rate to drop more than 8.5 percent to around $432 billion for this year. In the beginning of 2011, the organization painted a more positive picture of mortgage lending, predicting an increase to $616 billion – the first in six years. MBA now believes the numbers will increase in 2012.
The Failure to “Make” a Market for Housing Inventory
A recent study demonstrates Americans want to own homes; however, the current environment makes it difficult for many potential homebuyers to qualify for a mortgage. Even individuals once considered “prime” borrowers under previous underwriting guidelines, cannot quality for a mortgage due to stricter underwriting standards imposed by the GSEs.
In fact, Ben Bernanke stated in his June 22, 2011 news conference, the bottom 33.3 percent of “prime” borrowers, who met the criteria to qualify for a mortgage before the housing crisis, cannot obtain a mortgage – in a setting of low mortgage rates and low home values -- because of the tighter loan requirements. It even difficult to get a mortgage refinance.
Recently, Federal Reserve Chairman Ben Bernanke made the following statement, “the housing sector is very important to the overall recovery, and so we’ve paid a lot of attention to that.”
Nonetheless, the real estate market continues to stifled economic growth. In June, the Feds lowered the economy’s projected growth rate, from 3.1 percent to 3.3 percent, as stated in April, to 2.7 to 2.9 percent.
Most Americans understand the historical significance of the housing sector’s role in providing a solid foundation for the country’s prosperity. Why tighten standards so that one-third of the most credit worthy borrowers cannot purchase homes?
The pendulum has swung from extreme to another. Before the period of greed, irresponsible mortgage products, and questionable activities in the mortgage market -- traditional credit standards were not perfect, but they worked.
We have gone from an environment that approved borrowers for million dollar homes without proof of income, to “over reacting and making the standards excessively high,” said Nobel-prize laureate Columbia university economics professor Joseph Stiglitz.