Wednesday, March 04, 2015

Private mortgage underwriting can benefit America


“Isn't this what got us in trouble in the first place?” 

That was the first reader comment following a CNN/Money web article concerning a recent shift by government sponsored entities (GSEs) who buy most mortgages from lenders, to accept down payments as low as 3%. The previous minimum was 5%.  In an era when banks are forced to hold more capital, the GSEs which became insolvent during the financial crisis and received one of the largest bailouts in American history, have cut the minimum down payment for home buyers.

This policy change enacted by the Federal Housing Finance Agency (FHFA) which regulates the GSEs and by extension, influences trillions of dollars in mortgage exposure to American taxpayers, is worrisome.  Defenders of the FHFA actions point out that the change still protects taxpayers by requiring private mortgage insurance (PMI) and it applies only to issuance of fixed rate loans. 

Fixed rate requirement
To be fair, fixed rate notes help borrowers to service their debt predictably, which in turn helps to manage taxpayer exposureMany will recall that waves of defaults occurred in 2007-2008 after in-over-their-heads borrowers experienced mortgage payment increases from adjustable rate loans that reset to higher interest rates.  

Private mortgage insurance requirement
The PMI component offers less comfort to critics.  PMI is by design reactive -- it kicks in after default.  President Obama recently directed the Federal Housing Authority (FHA) to decrease premiums it collects for FHA mortgage insurance. (The FHA is an agency of the federal government that insures private loans issued for new and existing homes).  Like the GSEs, the FHA mortgage insurance fund required a taxpayer-funded lifeline in 2013, after unprecedented default volumes.  The stated intention behind all of these moves is to lower the cost of a conventional mortgage for lower income home buyers. According to HUD, these lower mortgage insurance premium rates (alone) will add 250,000 new first-time home buyers. Should the goal be 2.5 million new first-time buyers?  Would that make the move more successful in the eyes of policy makers or their base?  

The debate, my take
We continue creation of potentially catastrophic bubbles inflated by some noble intentions and lots of ignoble politics.  I'm dismayed when I encounter people who still prefer to blame The Great Recession completely on the banks.  They completely ignore an indispensable factor -- federal government housing policy.  Without its unparalleled ability to encourage loans to anyone with a pulse, the housing crisis -- and subsequent financial paralysis -- could not have occurred.  There would not have been enough lousy loans to securitize.

Private sector alternatives
Private sector partnerships can help mitigate publicly-backstopped asset bubbles in the sub-prime housing markets.  Such programs, which are beginning to take hold in the Twin Cities and elsewhere around the country -- prove that public-private partnerships can work when funded by entities and accredited investors risking their own money.  

Such programs can help moderate the huge spigot of taxpayer-sponsored mortgage credit and mortgage insurance that the Left continues to embrace too fully.