Back to the Races


dice

Terrific. I guess it’s high time to roll the dice again on an overpriced home market. (That’s overpriced relative to median incomes and rent multiples.) People can’t afford homes because of a stagnant labor market, but that’s okay – let’s give everyone cheap loans and easy credit standards, since that worked so well last time. The real problem is that monetary policy has encouraged banks to build reserves and hold those reserves in asset markets instead of taking the risks of lending to home owners for overpriced housing assets. Relaxing lending standards doesn’t change this and only encourages the riskiest lending by marginal players in the mortgage lending business.

U.S. Backs Off Tight Mortgage Rules

In Reversal, Administration and Fannie, Freddie Regulator Push to Make More Credit Available to Boost Housing Recovery

By Nick Timiraos and Deborah Solomon

WASHINGTON—The Obama administration and federal regulators are reversing course on some of the biggest postcrisis efforts to tighten mortgage-lending standards amid concern they could snuff out the fledgling housing rebound and dent the economic recovery.

On Tuesday, Mel Watt, the newly installed overseer of Fannie Mae and Freddie Mac, said the mortgage giants should direct their focus toward making more credit available to homeowners, a U-turn from previous directives to pull back from the mortgage market.

In coming weeks, six agencies, including Mr. Watt’s, are expected to finalize new rules for mortgages that are packaged into securities by private investors. Those rules largely abandon earlier proposals requiring larger down payments on mortgages in certain types of mortgage-backed securities.

The steps mark a sharp shift from just a few years ago, when Washington, scarred by the 2008 crisis, pushed to restrict the flow of easy money that fueled the housing bubble and its subsequent bust. Critics of the move to loosen the reins now, including some economists and lenders, worry that regulators could be opening the way for another boom and bust.

For the past year, top policy makers at the White House and at the Federal Reserve have expressed worries that the housing sector, traditionally a key engine of an economic recovery, is struggling to shift into higher gear as mortgage-dependent borrowers remain on the sidelines.

Both Treasury Secretary Jacob Lew and Federal Reserve Chairwoman Janet Yellen last week noted the housing market as a factor holding back the economic recovery.

Mr. Watt, the former North Carolina congressman who took over as the director of the Federal Housing Finance Agency in January, used his first public speech on Tuesday to lay out the shift in course for Fannie and Freddie, and pegged executive compensation at the companies to meeting the new goals.

Fannie and Freddie, which remain under U.S. conservatorship, and federal agencies continue to backstop the vast majority of new mortgages being issued.

The FHFA has recently attempted to lure private investors back into the housing-finance market—and reduce the Fannie and Freddie footprint—by raising the cost of government-backed lending.

With few signs that private investors are returning on a large scale, Mr. Watt signaled a clear break with his predecessor, Edward DeMarco, who left the FHFA last month after nearly five years as its acting director.

“I don’t think it’s FHFA’s role to contract the footprint of Fannie and Freddie,” Mr. Watt said during a discussion at the Brookings Institution in Washington. Winding down the companies without clear proof that private investors are willing to step back in “would be irresponsible.”

His comments signal a move away from treating Fannie and Freddie as “institutions in intentional decline” towards “institutions that should be better prepared to form the core of our system for years to come,” said Jim Parrott, a former housing adviser in the Obama White House.

Mr. Watt’s remarks are significant, given legislation to overhaul the mortgage-finance giants and replace them with a new system that reduces the government’s role in housing appears headed for a dead end in the current session of Congress.

Mr. DeMarco in a separate speech at a banking conference in Charlotte, N.C., on Tuesday, urged restraint: “Do not confuse weakening underwriting standards and underpricing risk with helping people or promoting market efficiency.”

The new steps are the fruit of three years of strenuous pushback by those opposed to tighter lending standards.

In the wake of the 2010 Dodd-Frank law, regulators proposed a spate of new rules intended to eliminate questionable mortgage products and remove any incentive banks had to make loans unlikely to be repaid.

Among the biggest changes that were proposed: Borrowers would either have to put 20% down, or the bank would have to retain 5% of the loan’s risk once it was sliced, packaged and sold to investors.

The March 2011 proposal triggered a huge outcry from lawmakers, affordable-housing groups and the real-estate industry, all of whom said it would put the brakes on homeownership for millions of credit-worthy borrowers, particularly first-time buyers and minorities. [Note: Instead we’ve pushed the prices out of their reach and now want to enable them to borrow more debt! Is this insane?]

The potential for a high down payment also raised alarm bells at the Department of Housing and Urban Development, one of six writing the rule, according to government officials.

HUD officials agitated for a gentler approach, telling counterparts that a high down payment wasn’t the only way to prevent defaults, but would likely destroy any chance for a housing-market recovery.

At a meeting before the rule was proposed, a HUD official warned fellow regulators away from a 20% down payment, saying that “the impact is between uncertain and bad,” according to a person familiar with the discussions.

When the five other agencies were not swayed, HUD took another approach and refused to sign off on the proposal unless a 10% down payment was included as an alternative. Regulators agreed.

By August 2013, more than 10,000 comment letters had poured in to the agencies, and the response was almost universal: Regulators should avoid a high down-payment level.

The groundswell caught the attention of U.S. policy makers, who began to worry about the collective impact of so much new regulation.

Regulators announced a series of steps Tuesday that they said could help ease standards—abruptly raised by lenders during the financial panic—and make it easier for first-time and other entry-level buyers.

Mr. Watt said that he would direct Fannie and Freddie to provide more clarity to banks about what triggers “put-backs,” in which lenders have been forced to spend billions of dollars buying defective loans sold during the housing boom. To guard against future put-back demands, lenders say they have enacted standards that go beyond what Fannie, Freddie and other federal loan-insurance agencies require.

Mr. Watt said that he hoped that the changes would “substantially reduce” credit barriers, “and that lenders will start operating more inside the credit box that Fannie and Freddie” provide.

Shaun Donovan, the HUD secretary, announced on Tuesday similar changes designed to encourage lenders to reduce similar restrictions on loans insured by the Federal Housing Administration, which is part of his department.

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