Recent estimates by the Mortgage Bankers Association that home-loan originations are projected to fall by more than 30 percent this year is only the most recent data showing that the U.S. mortgage market continues to struggle. In spite of improving home prices, increasing new-housing construction, and impressive earnings by major housing finance firms, access to mortgage credit continues to be out of reach for potentially millions of creditworthy borrowers.
Potential first-time homeowners have been particularly squeezed out of the housing market by a combination of overly restrictive credit standards and a disproportionate share of investors purchasing formerly owner-occupied housing.
Typical down payments for loans backed by Fannie Mae and Freddie Mac, for example, are close to 20 percent. And an astounding 42 percent of home sales in November of last year were for cash—typically to investors. (In 2012, the median U.S. existing-home sale cost was $176,900, equating to a 20-percent down payment of $35,380, according to the National Association of Home Builders; the median U.S. household income, between 2008 and 2012, is $53,046, the Census Bureau reports.)
With housing-related activities accounting for between 17 to 18 percent of the U.S economy, unnecessarily locking families out of homeownership undermines the U.S. economy and contributes to the continuing weak labor market. And because the family home is the most important asset of the typical American family, unnecessary barriers to homeownership also limits the ability of households to build wealth.
According to a recent Urban Institute report, young adults ages 29-37 have 21 percent less wealth than did their parents at their age. An inability to buy a home at the same rate their parents did at their age is a key reason for this disparity.
People of color are also disproportionately impacted by the overly restrictive housing market; between 2007 and 2012, loans to African-Americans and Latinos have fallen by 73 percent and 66 percent respectively.
Unfortunately, rather than improving access to mortgage credit, many policymakers are heading in the opposite direction—toward making credit less, rather than more, available.
The Protecting American Taxpayers and Homeowners, or Path, Act—introduced last year by House Financial Services Committee Chairman Jeb Hensarling, R-Texas—would all but eliminate the federal housing finance infrastructure that for 70 years has enabled millions of Americans to access sustainable and affordable homeownership.
That proposed law deviates so far from our current housing finance system that Moody's Analytics estimates that Path, if enacted, would result in the elimination of the 30-year fixed-rate mortgage for most households and increase mortgage interest rates by nearly a full percentage point. And obtaining a down payment of less than 20 percent would also be rare. Yet despite the extreme nature of the bill, it has already passed the House Financial Services Committee, and elements of it could become law.
Another recently introduced bill is the Housing Finance Reform and Taxpayer Protection Act of 2013, introduced by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va. That bill maintains a strong federal role in the housing finance system while addressing many of the current system's major weaknesses, but fails to require the new system to provide broad access to safe and affordable mortgage credit for all communities.
Since the housing market's implosion, many policymakers have avoided assertively advocating for access to affordable home loans due to widespread misunderstanding by the public about the causes of the housing foreclosure crisis. To many, "affordable lending" has become synonymous with "reckless and irresponsible" underwriting.
After all, three often recited reasons for the housing market's woes are:
- The federal government expanded access to homeownership to households that were not prepared to accept that responsibility.
- The Community Reinvestment Act, or CRA, forced banks to make unsound and risky loans.
- Fannie Mae and Freddie Mac undertook too much risky lending, dooming borrowers and the broader market.
Yet, both facts and common sense dismiss all three of these explanations. The loans that were at the epicenter of the foreclosure crisis were high-cost subprime loans of which only 9 percent in the decade leading up to the crisis went to first-time homebuyers.
The argument that CRA was responsible is equally without merit; the Federal Reserve Board concluded that only 6 percent of high-cost (a proxy for subprime) loans were covered under CRA.
As for Fannie Mae and Freddie Mac, for most of the housing bubble, they only guaranteed the safest of loans, which is why their market share cratered as Wall Street swelled on subprime mortgage products. When the two housing giants reversed course in 2006 and began buying and securitizing unsustainable exotic loans (an inarguably bad idea), the foundation for the foreclose crisis was already firmly in place.
What really happened is that in the decade leading up to the foreclosure crisis was that the housing market had become saturated with reckless and unsustainable loans that were very profitable for financial firms yet highly risky for consumers.
A major share of subprime loans were actually designed to fail—that is, they were designed to trigger an unaffordable increase in the loan's interest rate, typically two or three years after the loan's origination.
That process was intended to force borrowers back to their lenders to refinance their mortgages back down to an affordable payment and, in the process, pay another round of unjustified high origination fees. In short, subprime loans were not about homeownership but rather about financial exploitation.
Private investors had an insatiable appetite for these sorts of loans, and the risk they posed were spread across the financial system.
The public's confusion on this issue is, however, not happenstance. Substantial money has been poured into the development of policy papers, media outreach, and conference presentations that misrepresent the facts of the causes of the crisis.
Misinformation helps to deflect attention away from the need for strong federal regulation of the financial markets that was absent during the ballooning of the housing market. In fact, placing the blame for the housing market's woes on failed federal attempts to promote homeownership sets the table for even less adequate regulatory oversight.
Federal support for well-documented and underwritten, low-down-payment, 30-year fixed-rate mortgages to first-time borrowers was not the cause of the housing crisis and, as a result, restricting access to affordable home loans to creditworthy families is not an appropriate response.
As Congress continues to consider housing-finance reform legislation, it must ensure the future system serves all low- and moderate-income borrowers as well as communities of color and creditworthy borrowers with safe, affordable mortgage credit.
In addition to legislative action, President Obama's recent appointment of former Rep. Mel Watt to head the Federal Housing Finance Agency open additional doors to important reform of the housing finance system. As the regulator of housing finance giants Fannie Mae and Freddie Mac, FHFA has immense power to influence the housing market. There are numerous steps Mr. Watt could take to promote a robust housing recovery and make credit more widely available for creditworthy borrowers.
The worst of the risky and irresponsible lending that let to our housing collapse have been purged through the mortgage reforms enacted in 2010 through the Dodd–Frank Wall Street Reform and Consumer Protection Act. But the task of creating a mortgage market that works for America's families is far from complete.
Now is the time for the FHFA, Congress, and the White House to act affirmatively to reinstate homeownership as a critical pillar of the American Dream.
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