Imagine this scenario: The Justice Department is pushing states to resolve their potential lawsuits against the five biggest mortgage lenders, whose automated systems robo-signed foreclosure documents. A settlement would at least avert a legal battle that could take years, cost a fortune, and thwart a recovery of the housing market. Yet at the same time, the Federal Housing Finance Agency, the top housing regulator, is suing 17 lenders for similar misdeeds.
It’s a perfect microcosm of the disjointed federal housing policy. Do policymakers want to prop up struggling homeowners, or do they want to reverse problems that contributed to the foreclosure crisis, focusing on holding lenders accountable and spurring home sales? Instead of mounting a coordinated strategy with clear goals, Washington is awash in discordant, halfhearted, and contradictory solutions to the housing crisis—the main roadblock to an economic recovery. The result is that lenders, frozen by uncertainty, are hoarding cash instead of lending it. At a time when interest rates are hovering near historic lows, would-be homeowners find it increasingly difficult to get a mortgage.
Many of the conflicting policies concern the fatally flawed “government-sponsored enterprises” Fannie Mae and Freddie Mac, private companies with explicit government guarantees. Those guarantees turned explicit when the mortgage giants nearly went bankrupt in 2008 and the government took conservatorship to prevent their collapse (pumping in $169 billion since then to keep them afloat).
Because Fannie and Freddie own $5 trillion in mortgage assets—60 percent of the market—their health affects the entire housing economy. To shield taxpayers from backing faulty mortgages, Fannie and Freddie are asking lenders to buy back billions of dollars of loans that were made several years ago. But lenders forced to take on mortgage debt (that the borrowers may never pay back) are understandably gun-shy about issuing new loans. “The government is working at cross-purposes,” said Laurence Platt, a real-estate finance expert with the law firm K&L Gates. “They have created a climate in which there is no incentive to lend.”
What’s more, Fannie, Freddie, and other investors are hitting mortgage lenders with fees, both for speeding along foreclosures and for carrying them out too slowly. Lenders and consumer advocates—two groups with no love lost between them—agree that the administration can’t ask lenders to exhaust all alternatives before foreclosure when Fannie and Freddie are punishing them for doing just that. “It’s counterproductive,” said Janis Bowdler, a housing advocate with the National Council of La Raza, a Latino civil-rights organization. “Some of their policies are hurting credit availability at the more modest end of the scale.”
Even government guarantees aren’t enough to mollify skittish lenders. The Federal Housing Administration, a division of the Housing and Urban Development Department that insures mortgages to low- and moderate-income borrowers, theoretically lends to people with credit scores as low as 580 (711 is the average American’s score). Nevertheless, most lenders now require minimum credit scores in the 640-to-680 range, said David Stevens, a former FHA commissioner who heads the Mortgage Bankers Association. For loans backed by Fannie and Freddie, lenders are often asking for scores into the mid-700s—and, in many cases, they’re tacking on tough restrictions on property type and income history that tend to squeeze out people on the margins. Lenders are acting “overly cautious, where they won’t lend to the full breadth of investors’ standards … because they just can’t afford to do a bad loan,” Stevens said. Despite widespread consensus that lenders should reduce their reliance on government support, the mortgage-finance system is more influenced than ever by the government.
Congress has done nothing to clarify things for lenders or housing advocates. Regulators from across the executive branch, who typically take cues from lawmakers, have debated various mortgage reforms for over a year, but they haven’t agreed on uniform standards for the entire mortgage market. Instead of pushing legislation, lawmakers punted on reform, waiting to see if regulators would take the lead.
Credit no doubt flowed too freely before the crisis, and undeserving borrowers got loans that they couldn’t pay back. But even consumer advocates, who want the mortgage industry to work harder to help struggling borrowers, say that the government has to devise some clear set of reforms just to give banks the certainty they crave before loosening credit.
“Banks like bright lines more than anything,” said John Taylor, executive director of the National Community Reinvestment Coalition. “The sooner that happens, the sooner we will be able to identify what loans are safe and sound, and then we’ll see which lenders are constricting credit to the point of discriminating against working-class people.” If banks don’t lend, how can low- and middle-income borrowers have any chance at all?
This article appears in the January 7, 2012, edition of National Journal Magazine.