Rebuilding

Mortgage lenders urged to approve a wider range of borrowers

Soon, people who have experienced bankruptcy or foreclosure may find it a little easier to get a mortgage.

When US Counselor to the Secretary of the Treasury for Housing Finance Policy Michael Stegman addressed the 2013 American Securitization Forum in January, he acknowledged that during the recession, “bold and unprecedented actions” were needed to stabilize the housing market crash. He suggested that mortgage lenders essentially overcorrected in locking down their lending criteria, and now that the initial crisis has passed, it’s time to relax some of those restrictions. He mentioned that many financially-responsible people still can’t get approved for a mortgage, and this is effectively stalling the housing market recovery it was designed to heal.

“While lending was too fast and too loose in the run-up to the financial crisis, we’re now in a situation where many families that can effectively take on monthly mortgage obligations are being denied access to credit. …Tighter lending standards are probably preventing creditworthy borrowers from buying homes, and this could be slowing the revival in housing and slowing the economic recovery.”

In the same speech, Mr. Stegman mentioned that the government still backs more than 80% of new mortgages, but would like to become less involved in the mortgage business. I’m a little skeptical about that, particularly because Fannie Mae just posted record-setting profits. Getting banks more comfortable with relying on their own underwriting practices depends on finding the correct balance between risk and reward. We’ve seen both extremes – the open lending that led to the recession, and the lockdown we’re currently experiencing – and neither is sustainable. If Fannie Mae pulls out gradually, perhaps mortgage lenders can work with the government to come up with practical rules that allow them to calculate reasonable risk, keep enough business to turn a profit, and support working families and communities.

In fact, Stegman outlined some new rules for the mortgage process to ensure that we don’t go back to the dark days of irresponsible no-doc loans for everyone. These guidelines, he says, can help provide access to sustainable mortgage credit, even during times of severe market stress, to “borrowers across the income spectrum”. As reported in the Washington Post last week, this last part is critical – because right now, for all but the wealthy, the housing market is still in recession.

“If you were going to tell people in low-income and moderate-income communities and communities of color there was a housing recovery, they would look at you as if you had two heads. It is very difficult for people of low and moderate incomes to refinance or buy homes.”

As long as it’s not just typical government posturing, I believe the proposed strategies and rules could help the market recover more quickly. It will be interesting to see what real change happens, and how long it takes.

 

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