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Is Another Housing Crisis Brewing?

Price wars mimicking actions that lead to disaster for borrowers

 
Spring could be blossoming more than just an improved housing market. It could be softening the provisions that have kept loose credit standards in check for several years.
 
To begin, the Obama administration has already announced that the Federal Housing Administration will start to lower their annual insurance premium requirements. The intention is to make mortgages more affordable to first time home buyers and those that otherwise qualify for FHA loans, the population so many thought would prime the real estate recovery after cash investors all but dried up. So far, that has not been the case. Millineals and boomerang buyers have proven to be less than enthusiastic about adopting homeownership into their lives, for now at least.
 
Also, the Federal Housing Finance Agency is hinting that they too are leaning towards softening their standards by revising their “guarantee fee”, which is charged by Fannie Mae and Freddie Mac to cover the credit risk on the loans that are guaranteed by the federal mortgage agencies. The news was issued by Mel Watt, the FHFA’s director before the House Financial Services committee last week.
 
Could this be a nod of things to come that mimic the stages of another cataclysm?
 
Let’s take a look at the history at the rivalry between FHA and Fannie Mae.
 
Game Set Match
 
In 1994 Fannie Mae came out with the 3% down, 30 year mortgage to compete with FHA. At the time Fannie Mae was regulated by the Department of Housing and Urban Development. What’s interesting about that relationship is that it would play into a supportive stance 10 years later, with HUD crediting Fannie Mae to having an large part in the “revolution” in affordable lending to “historically under-served households.”
 
Since then, Fannie Mae has been driving to have more market share than FHA. Both FHA and Fannie Mae have had to meet guidelines set in 1992 by Congress to expand the number of loans issued to moderate and low income borrowers. Since FHA is the main rival for mortgages, the competitive advantage comes in the way of decreasing credit standards and pricing. The latest in this competition is the lowering of annual mortgage insurance premiums.
 
housing crisis fannie mae fha In December 2014, Fannie Mae threw a swing with the re-introduction of the 97% LTV (loan to value) 30 year loan (this loan wasn’t allowed in 2013.) The FHA’s reduction in their mortgage-premium was simply a volley. One can only guess that the next action will be the reduction of the guarantee fees Fannie and Freddie charge to cover the risk on loans they back.
 
Setting the Standard
 
In 2011, Congress put regulations in place that FHFA adjust the prices of guarantee fees and mortgages to make sure they mirror the actual risk of loss, understandably, to cancel the unhealthy price war between the two GSE’s. The acting director of FHFA since March 2009, Ed Demarco, has been heading off such changes until he resigned in January of 2014. Mr. Watt, the newest director of FHFA, negated Ed Demarcos efforts to comply with Congress regulations. Since Fannie Mae has re-introduced their highly-subsidized 3% down mortgage, enormous new cross-subsidies will follow, ignoring the Congressional mandates put in place in 2011.
 
Another part of the regulations required FHA to keep a buffer against capital losses equal to 2% of the value of its outstanding mortgages. FHA gets this capital from the profits made on mortgages and future premiums. However, it hasn’t met the capital obligation since 2009 and according to their latest records, does not suspect it will match the obligatory figure until fall of 2016. So what happens if our economy has another slump, or catastrophe?
 
Allowances and Commissions
 
In a capitalist environment, it may seem beneficial for consumers to have top agencies competing. However, price wars dealing with mortgages between government agencies are hotbeds for danger, considering the ability to access cash and minimum capital requirements grant the agencies to carry on for years; a perilous position for taxpayers. Also, statistics from a 2009 study from FHA show that low down payment, 30 year loans to borrowers with low credit scores were consistently subsidized by low-risk borrowers.
 
It’s worthy of noting that these products would not be propagated were it not for the support by special interest groups like the National Association of Realtors and the Urban Institute. The NAR had and has an entire population of boots on the ground to condone low-down high-risk products. Just as in the run up before the last housing crisis, real estate agents saw the opportunity to sell more homes and make more commission, so the campaign for homeownership grew like wildfire. I’m a licensed agent and I love what I do, but, sales is still sales and when paychecks take precedence to prudence, there will be a conflict of interest. How many agents can you see turning away a qualified Buyer?
 
Do these products really benefit our economy in the long run?
 
housing crisisAt first glance, making mortgages more affordable by lessening credit standards can be viewed as a noble cause. However, statistics show that making mortgages available to moderate and low income households have continuously provided high risk loans that destine many borrowers to default. It’s at the insistence of federal mortgage agencies and their regulators that private lenders were encouraged to relax their underwriting standards throughout the run up of the financial crisis, which seems to be happening again. So if and when the next crisis hits, now both private lenders, taxpayers and homeowners will be the ones to pay the ultimate price.
 
There’s the argument that the American dream consists of owning a home, which stimulates homeowners to purchase consumer goods and pushes the economy along. But what if it’s more than borrowing 97% of the current home value? What if it’s only borrowing time, causing more fees for other borrowers, causing predictable defaults and costing the economy much more deeply. Is it worth it?
 
What do you think? Are we all more responsible and wiser to handle a softening credit market, or are we heading for disaster? Leave your comments below.
 
Tracy(G+) is a Distressed Property Expert, Investor, Rehabber, and pre-foreclosure specialist in the Phoenix-metro market. She also is an avid blogger, social media enthusiast and contributor to leading Real Estate Magazines. Connect with Tracy on Facebook.

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