Remember the Titans
By Hunter BossonPublished November 9, 2014By Hunter Bosson, 11/9/14
Homeownership is part of the American dream. Aside from being a key symbol of a place in the American middle class, it is also a historically safe investment. But mortgages are by no means easy to acquire. In the wake of the financial crisis, credit shrunk up and tough restrictions were proposed on what kinds of mortgages the government-backed mortgage giants Fannie Mae and Freddie Mac can insure. In recent months, that has changed radically, and politicians and bankers are pushing back mortgage safeguards in the name of expanding homeownership. Relaxation of lending requirements for Fannie Mae and Freddie Mac has enormous potential to expand home ownership, but the willingness of politicians to welcome subprime mortgages and reduce financial firm liability to spur lending is a worrying sign for American speculation to come.
Following a sluggish economic recovery, politicians have not only kept Fannie Mae and Freddie Mac alive, but have severely deregulated them. Although Mae and Mac do not issue mortgages, they buy them from banks and guarantee the resulting securities. The creation of Mae and Mac as government-sponsored middleman through acts of Congress was meant to bring greater liquidity to the housing market. As a result, both entities have traditionally been regulated to prevent abuses of their market power and to ensure that too much credit is not being diverted to purely speculative borrowing. As a result, borrowers have to make deposits that represent some portion of the total mortgage, and until recently, banks had to maintain a 5% share in the securities of the mortgages they sold to Mae and Mac. But with the new regulations, borrowers only need a 3% deposit, and the 5% share in risk has been removed. Much of this has occurred following the appointment of outspoken home ownership advocate Mel Watt, head of the Federal Housing Finance Authority (FHFA). Such deregulation has the potential to profoundly help the United States economy and its home-seekers, at least in theory.
The United States economy is still hampered by tightened credit, and deregulation could lead to a more vibrant housing market and higher standards of living. Banks are currently sitting on a lot of cash, the result of skepticism about the world economy and fear of being saddled with fines and settlements of the nature that has cost Wall Street billions since 2008. Were banks to begin lending again, the housing market could fully recover, helping the construction industry and increasing the number of families that can afford to own their own property. In fact, the FHFA justified some of the new regulations on the grounds that additional constraints on mortgage-credit availability" could "disproportionately affect LMI (low-to-moderate-income), minority or first-time homebuyers." However, for all the optimism, the trend towards deregulation remains a worrying sign.
Through deregulation, we are removing many of the checks to protect the American taxpayer and encouraging risky speculative behavior of the sort that caused the '08 financial crisis in the first place. Although some, notably David Stevens of the Mortgage Bankers Association, argue that mortgages are already insured and protected to such a degree that further regulation does more harm than good, there is good reason to believe otherwise. Homes can now be purchased with barely any initial payment, allowing for another wave of subprime mortgages. And now that banks do not have to share in the risk of the mortgages they issue, there is little financial incentive for firms to lend with prudence. Even Mae and Mac, although heavily regulated, have again been swamped with investors eager to return to the highly lucrative days of the pre-crash housing boom. Now, as before, the people most likely to be stuck with the short end of the stick are homeowners themselves, particularly the same LMI homebuyers that these reforms are supposed to be helping. Predator lending becomes much easier when there is no required state anywhere in the lending process.
The financial landscape is very different today from six years ago, but we must still proceed with care. Investors, homeowners, and regulators alike are all more careful and weary of recession than those that caused the crash, but after years of recovery the temptation of looser credit and expanded homeownership is extremely tempting. Fannie Mae and Freddie Mac may well deserve a place in the future of America's mortgage issuing and securitizing scheme, but any such future needs to hold those lenders accountable. There is always such a thing as too much deregulation.