The chairman of the Federal Housing Finance Agency, which is the agency that oversees the two government-sponsored enterprises Freddie Mac and Fannie Mae, gave a recent speech at the yearly conference of the Mortgage Bankers Association. He suggested that mortgage bankers may begin loosening their underwriting standards in order to increase home sales.
The speech was another example of the mortgage industry’s attempt to raise the housing market’s bottom that was a major factor in the near-total collapse of the American economy only six years ago.
If the regulation rollback is permitted, it’s likely that American homeowners will once again face a housing crisis as they struggle to keep homes from falling into foreclosure.
The predatory lending practices that got homeowners trapped in homes that were financially underwater and they could no longer afford have been slowed by Congress, which only took action after the horse was out of the barn and galloping down the road.
Since private mortgage companies either went under or are in the early stages of a shaky recovery, Freddie and Fannie have begun guaranteeing or purchasing 90 percent of new loans.
The “representations and warranties” clause of home sales contracts contains language that allows the GSEs to identify loans not up to standards and can coerce the lender into buying them back. The FHFA has settled 17 civil cases brought against them since 2011, amounting to more than $18.2 billion in cash. They also pocketed billions in other repurchases.
Additional regulations and consequences for bad loans have made the housing market safer for consumers. However, it cut into industry profits, making it particularly difficult to secure lending. They now claim that Fannie and Freddie are causing them to lose all their business.
To qualify for GSE funding, consumers must have a minimum credit score of 680, while private lenders insist upon a score of 740. The MBA chairman indicated his willingness, in industry parlance, to “open the credit box.”
If the GSEs can no longer enforce lending standards with any reliability, the mortgage marketing policing will be carried out by the Consumer Financial Protection Bureau. They are limited by size and resources in their monitoring of a trillion dollar mortgage market.
Consumers should be very wary of this new development that could possibly lead to more foreclosures. Those already in financial hot water with their lenders may wish to consult with a Miami attorney who is familiar with foreclosure and bankruptcy proceedings.
Source: New Republic, “The Mortgage Industry Is Strangling the Housing Market and Blaming the Government” David Dayen, Oct. 21, 2014