Obama Touts More Risky Home Loans

New policy is bad news for taxpayers, lawmakers and experts say

January 8, 2015

President Barack Obama announced a new measure on Thursday to make mortgages more affordable for low-income homebuyers, a policy that could heighten risk in a still struggling housing market.

Obama said the Federal Housing Administration (FHA) would cut annual insurance premiums on government-backed mortgages during a speech in Phoenix, Ariz.—an area devastated by plunging home prices and foreclosures following the 2008 mortgage meltdown. The measure is projected to allow up to 250,000 low-income buyers to obtain a home.

The president also said the FHA would keep standards in place that evaluate whether a borrower can afford the mortgage payments.

"Over the next three years, these lower premiums will give hundreds of thousands more families the chance to own their own home, and it will help make owning a home more affordable for millions more households overall in the coming years," Obama said.

He still urged the crowd not to "buy something you can’t afford" and added that "we’re not going down the road again of financing folks buying things they can’t afford."

Obama’s policy aims to boost a housing market that has failed to attract first-time homebuyers. Many young adults saddled with student loan debt and stagnant wages have opted to rent homes instead of buying them. Federal Housing Finance Agency (FHFA) Director Mel Watt also recently announced the resumption of low down payment mortgage loans to aid homeownership—a return to the easy lending conditions that existed before the 2008 crisis, critics say.

Increasing FHA-insured mortgages will likely inject more risk into the housing market. According to the American Enterprise Institute’s (AEI) International Center on Housing Risk, FHA borrowers tend to have high debt-to-income ratios that can make it more difficult to meet payments. High-level risk among FHA-backed loans also fuels volatile home prices in low-income and minority areas.

AEI’s Edward Pinto and Stephen Oliner say higher home prices and weak economic conditions have stalled the housing market, rather than the tough lending standards criticized by Obama and Watt. Loose standards for mortgage loans contributed to the housing crash in 2008.

"The softness in mortgage lending [is] not due to tight standards but to reduced affordability, loan put back risk, and sluggish economic recovery" they wrote in a recent report.

Sen. Richard Shelby (R., Ala.), newly elected chairman of the Senate Committee on Banking, Housing, and Urban Affairs, expressed concerns that lower premiums could threaten the solvency of the FHA and pose a risk to taxpayers. Obama’s 2014 budget included a $943 million taxpayer bailout to account for bad loans insured by FHA.

"President Obama’s announcement that he will lower FHA mortgage insurance premiums through executive action is irresponsible and bad news for taxpayers who could be on the hook for yet another massive bailout," Shelby said in an email statement. "I have long been concerned about the fiscal soundness of the FHA and believe that this unwise decision could only make matters worse."

Additionally, the White House said in an earlier press release that Obama supports more private capital in the mortgage system and an "end [to] the failed Fannie /Freddie duopoly business model." Fannie Mae and Freddie Mac, known as government-sponsored enterprises (GSEs), purchased risky subprime mortgage loans that defaulted in large numbers in 2008. The GSEs were placed under government conservatorship after a taxpayer bailout worth about $188 billion.

Proposals to reduce Fannie and Freddie’s role in the mortgage market are likely to face resistance from some in Congress. Fannie President and CEO Timothy Mayopoulos said this week that "this housing finance system works" and urged lawmakers to avoid large-scale changes. He noted that Fannie has provided the Treasury Department with $134.5 billion in dividends to pay back taxpayers.

However, that arrangement leaves Fannie without a capital buffer to absorb losses if another downturn occurs—meaning taxpayers could again be on the hook. Funds from Fannie and Freddie can also be used for other purposes rather than recouping taxpayers, such as helping the nation stay underneath its debt ceiling.