Federal Housing Finance Agency Director, Mel Watt, Faces Drawback on the Prospect of 3-Percent Down Mortgages. Many Politicians View the Decision as ‘Perilous’.
FOR IMMEDIATE RELEASE
Thursday, November 20th, 2014 – Orange, CA — In October 2014, Mel Watt announced the Federal Housing Finance Agency’s (FHFA’s) plan to allow Fannie Mae and Freddie Mac to back mortgages for borrowers who put down as little as 3 percent. This decision has sparked a lot of drawback and fear in Washington, D.C.. Currently, Fannie Mae and Freddie Mac purchase roughly two-thirds of all new home mortgages in the United States and package them into bonds. According to Bloomberg, “Fannie Mae accepted 3 percent down as recently as last November before increasing the requirement as part of a tightening of its underwriting standards”. This demonstrates that there has been a lot of back and forth decision making on this topic, which further emphasizes the fact that it is a highly disputed topic. This is something that politicians and industry executives have recognized as an ‘irresponsible opening of the floodgates’ (Bloomberg, 2014). It is also notable that should something go wrong as a result of this decision, it will be tax payers who have to pay the price, as they are the ones financing Fannie Mae and Freddie Mac.
Many think that an action such as this will bring the housing market (and as a result, the economy as a whole) back to square one. It was due to dangerous practices such as predatory lending and subprime loans that brought the economy to the Financial Crisis of 2008, but Watt strongly contends that it is nothing more than a “narrow effort” to bring more Americans, and especially minorities to the housing market. He says, “low down-payment loans are a safe way to help families with healthy incomes and meager savings buy homes” (Bloomberg, 2014). The target market is those who experienced substantial loss of wealth during the financial crisis as a result of abusive financial products, among other things. Bloomberg cites, “the U.S. homeownership rate has fallen to 64.4 percent from 69.2 percent in 2004 as blacks, Hispanics and first-time buyers struggle to get loans”.
Fannie Mae CEO, Timothy Mayopoulos responded to the drawback as well, noting that the 2010 Dodd-Frank act ensures the safety of these types of loans, and also included that just like all of the other loans purchased by Fannie and Freddie, the 3 percent down loans must meet qualified mortgage (QM) requirements. QM offers lenders protection from legal liability as long as their debt-to-income does not exceed 43%. 3 percent down borrowers will also have to attend debt counseling, and have stronger credit scores and histories than borrowers who put more than 3% down. However, the full list of requirements is currently being explored and will be announced in the beginning of December 2014.
A study by Fannie Mae data found that loans with down payments of between 3 and 5 percent have a minimal effect on overall risk, as in the past they have only made up a small percentage of total originations by the GSEs. Also, these loans (in the past) have required full documentation, high credit scores, and an appropriate DTI ratio. These borrowers will also be required to purchase mortgage insurance, as their down payments are less than 20 percent, so mortgage insurers are all for the proposition because the lower the down payment, the higher the mortgage insurance. Still skeptical, former congressional staff member, Mark Calabria, says, “This is just the camel’s nose under the tent. You start with low down payments for high-FICO borrowers, which you can do safely, and it erodes over time. It’s disingenuous or naïve to say it’s going to remain with high-FICO borrowers” (Bloomberg, 2014). What Calabria is saying is ‘where do we draw the line?’. Historically, when certain requirements have worked, the limits have been pushed further and further, until it pushed requirements so far that they were essentially out the window. Calabria is really nervous about what the requirement has the potential to become, not necessarily what the requirements are now.
Watt and the FHFA have also been under scrutiny for taking their sweet time as to whether or not G-fees will be raised, and if so when. Reuters notes that the FHFA will unveil its mortgage fee framework in 2015 but in the meantime Watt has put the decision on hold as raising guarantee fees (also known as g-fees) would block many Americans out of the market, and at the moment the object is to let more lower and middle class borrowers into the market. The FHFA was meant to raise g-fees in January of 2014, but as Watt was new to the director position, he wanted to have more time to study the subject matter. Watt responded to this criticism adamantly, “to say we should without a thorough analysis just increase G-fees…I think was inconsistent with my responsibilities…We expect to provide a framework and the rationale for it sometime during the first quarter of this coming year” (Reuters, 2014).
This week, Democratic senators also came down on Watt, as they wanted to push him to take action to reduce the principal on mortgages of troubled borrowers. Watt has yet to take a clear position on this matter. Bloomberg reports, “The National Community Reinvestment Coalition and the Center for American Progress are urging him to cut the principal on loans for troubled borrowers, and increase lending in inner-city neighborhoods”.
Overall, Watt and the FHFA are in no rush to make any decisions, but rather they are choosing to take their time and be calculated with regards to their action. In the end there is a lot of criticism about decisions, no matter what that decision may be. Some want for the ease of credit availability to boost the market, and others call for more regulation in fear of another housing crisis. Either way, Watt and the FHFA are going to move forward with detailed plans for all of these matters without taking the mass criticism to heart. The American public can only hope for the best possible outcome for the most homeowners occurs as a result of the new rules.
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