Federal regulators are attempting to lower credit and lending standards for home mortgage loans during a time when there is little demand for housing, some experts say, a move that could create another destabilizing bubble if the economy improves.
The Federal Housing Finance Agency (FHFA) and other government regulators have announced steps in recent weeks that would ease access to housing for high-risk borrowers. FHFA oversees Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that taxpayers were forced to bail out in 2008 after the risky home loans they purchased defaulted.
However, it remains unclear whether taking out risky, large mortgages would be a wise financial decision for many Americans, even if mortgage credit could be made more easily available. Wages are stagnant for many Americans, and more young adults saddled with student loan debt are choosing to live with their parents.
The share of homes purchased by first-time buyers dropped to an almost 30-year low this year as home prices rose. First-time buyers also comprised a smaller share of the housing market in 2006, when prices peaked before the financial crisis.
Josh Rosner, managing director of research consultancy Graham Fisher & Co., said in an interview that the government’s policy is still "biased" toward propping up the housing market to help the economic recovery. It is more likely that "housing will lag the economy," he said.
Additionally, recent proposals by the FHFA are have caused concern for some because Fannie and Freddie are not allowed to keep most of their earnings from selling mortgage-backed securities, Rosner said. Those profits go to the Treasury Department under an agreement reached in 2012.
Taxpayers could thus again easily be called upon to save Fannie and Freddie with billions of dollars if the companies expand mortgage lending. They would have no capital to absorb losses from bad loans.
"I find it really disturbing that we’re moving to the riskier products while Fannie and Freddie have no capital," Rosner said. "They should be raising capital."
FHFA Director Mel Watt sought to allay concerns last week that borrowers would default on home loans with low down payments. In remarks at the National Association of Realtors Conference & Expo, he said borrowers would need strong credit histories and other types of enhancements such as private mortgage insurance.
The full guidelines for the loans, which could have down payments between 3 and 5 percent, have yet to be released. "Subprime" loans with low down payments and lax credit requirements were a principal cause of the 2008 economic downturn.
Only a small number of homebuyers might initially take advantage of the new loan options. The Federal Housing Administration (FHA) also offers loans with low down payments.
The U.S. Mortgage Insurers (USMI) group said in a statement to the Free Beacon that it will act as a "second set of eyes" on the low down payment loans that it insures to help prevent default.
"We won't know the standards FHFA will apply until they are announced, but already Fannie Mae and Freddie Mac no longer purchase loans that do not conform to the Qualified Mortgage [QM] rule," USMI said.
The FHFA did not respond to a request for comment.