Return to reasonable lending opens door to homeownership
By David Liniger
Home-buying season is heating up. Homes sold faster in April than at any point in almost the last two years, according to data released by the National Association of Realtors (NAR). Existing-home sales are on pace to top 5 million this year.
Consumers are rushing into the housing market thanks in part to the Federal Housing Administration’s decision to reduce mortgage insurance premiums by 0.5 percent earlier this year. The move could save 2 million homeowners an average of $900 a year and allow a quarter of a million Americans to buy their first home.
Affordable financing doesn’t just help homebuyers. An increase in the number of potential buyers boosts prices for sellers. And it encourages builders to expand the supply of housing, which benefits the entire economy.
Lenders and regulators must commit to maintaining reasonable mortgage lending standards like these, which lay the foundation for sustained economic prosperity.
In recent years, many potential homebuyers have faced excessively strict lending requirements, including higher fees and premiums for mortgages insured by the federal government. These regulations prevented thousands of Americans with good credit from buying homes -- especially young people and minorities.
In 2014, the millennial generation was responsible for 32 percent of all home sales. Currently, only 30 percent of sales are to first-time buyers. That’s 10 percent below the historical average.
FHA has been seeing fewer mortgage applications because of the agency’s high fees and insurance rates. Homebuyers have found cheaper mortgages elsewhere -- or put off homeownership entirely.
FHA was created to help expand access to homeownership, especially to first-time buyers. By cutting insurance premiums, it will be able to fulfill that mission once again.
The agency’s critics claim that “loosening” credit standards will lead to another housing crisis. But today’s lending environment is vastly different from the pre-crisis one of seven years ago. It’s wrong to punish today’s borrowers for the problematic lending practices of the past.
Further, when evaluating a mortgage application, lenders prefer to develop a complete picture of a borrower. The financial crisis came about in large part because lenders failed to verify the information behind that picture. A return to the traditional practice of documentation and verification has led to the highest quality of underwritten loans and the lowest default rate in over a decade.
FHA has coupled its lending reforms with a $21 billion improvement in its single-family insurance fund, which compensates lenders in the event of default. Last year, for the first time since 2006, the agency’s capital reserves increased year-over-year and had a positive balance.
Other players in the mortgage market are following suit. Mortgage guarantors Fannie Mae and Freddie Mac have reduced down-payment requirements for first-time homebuyers. Under the new terms, buyers will only need to put down 3 percent of the home’s cost, rather than the previous minimum of 5 percent.
Down payments alone are poor predictors of default. FHA has successfully insured loans with 3.5 percent down for decades.
Like FHA, Fannie and Freddie have retained guidelines ensuring that potential borrowers have strong credit scores and full documentation.
The two government-sponsored enterprises have also promised to pursue a more reasonable practice of mortgage “put backs.” They’ll no longer require private lenders to assume responsibility for loans simply because they had typos.
Rather than lead to another financial crisis, the federal government’s new policies will empower folks who were previously prevented from becoming homeowners.
That’s good for the economy. Every home sale generates $60,000 in additional economic activity.
By committing to lower mortgage insurance costs and reasonable lending requirements, our nation’s top housing officials can signal that they’re serious about making homeownership a reality for millions of Americans. That’s a move we should all get behind.
Dave Liniger is CEO, chairman, and co-founder of RE/MAX LLC.