Mortgage Lending Made Easy Makes Me Uneasy

home_mortgagesYesterday was a pretty big day in the slow unwinding of post-crisis mortgage-lending policy making, according to the Wall Street Journal.

I’m not going to jump up and down and declare that this latest negotiated relaxation of federal mortgage standards means we’re back to the pre-Crisis madness.

On the other hand, it appears that all the tough policy talk – about shoring up lending standards, winding down Fannie and Freddie, requiring strict 20% down payments for new mortgages, and requiring mortgage securitization banks to retain at least 5% of the bonds they make to have ‘skin in the game’ – just went flying out the window yesterday.

As I mentioned recently, HUD is very focused on increasing lending, even if it means pushing banks back into the subprime space. One problem that HUD and the Federal Housing Finance Agency face is that mortgage standards appear high and tight for anyone with less than perfect credit or the traditional hefty 20% down payments.

In addition, mortgage originator and aggregator banks are scared to death of any misstep in the underwriting process, because that allows Fannie and Freddie to kick the mortgage back onto the mortgage bank’s balance sheet. Mis-steps, even tiny ones, also expose banks to the kinds of government lawsuits for which they’ve paid many billions of dollars in recent years, in what I basically believe to be “settle and quickly move on” situations for banks, rather than outright winnable cases for the government (but that’s another long story.)

Yesterday, Mel Watts of the Federal Housing Finance Agency announced in a speech to the Mortgage Lender’s Association:

1. A relaxation of the 20% down payment requirement for conforming loans, to as low as 3% down for certain qualifying buyers. Details to follow in coming weeks.

2. A new set of easier requirements that make it less likely Fannie or Freddie will kick back non-underwriting compliant loans to underwriting banks.

Separately, the FHFA indicated that banks will not have to carry 5% of the risk of mortgage bonds, if borrowers did not provide a 20% down payments. Banks hated that rule, and they got their wish.

These steps will clearly please both mortgage banks and borrowers in the short run.

In the medium to long run, we’ve definitely taken a giant leap toward riskier mortgage lending.

John Carney at the WSJ says

The rule [regarding banks holding 5% of mortgage securities themselves] isn’t just a small step back for mortgages, it is a giant leap backward for the entire financial system.

Those are fightin’ words.


Please see related posts:

New HUD Secretary seems to advocate for increased subprime lending

HUD disagrees that they advocate subprime lending, so let’s go to the transcript

Mortgages Part VIII – The Cause of the 2008 Crisis

Mortgages Part V – I Want A New Drug

On Housing Part III – 7 Big Opportunities


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