Fannie Mae and Freddie Mac increased loan standards about a dozen times in the last year. Photographer: Andrew Harrer/Bloomberg
Sue Stamper, a business owner in
Sacramento, California, wants to buy a home. After mortgage-
financiers Fannie Mae and Freddie Mac imposed the strictest loan
standards in more than a decade, she doesn’t qualify.
Pam Crawford of Lyon Real Estate is trying to sell a three-
bedroom bungalow on Sacramento’s east side for $179,000, a third
less than what it went for in 2004. She hasn’t found a buyer
even after cutting the asking price by $10,000 two weeks ago.
The two women, who haven’t met, illustrate the deadlock
crippling the U.S. housing market five years into the crash:
While a record share of Americans want to buy homes, U.S.
policies, often working at cross-purposes, are making it more
difficult. Government-controlled Fannie Mae and Freddie Mac have
boosted standards so high that some people previously considered
prime borrowers no longer qualify. That’s limiting a real estate
rebound that also has been damped by a state attorneys general
probe into foreclosure practices and an Obama administration
loan-modification program that has fallen short of expectations.
“It’s very important for a robust recovery that we get the
right credit standards,” said Joseph Stiglitz, a Nobel-prize
winning economist and professor at Columbia University in New
York. “Giving out unsupportable mortgages was a disaster, and
now the danger is overreacting and making the standards
excessively high.”
Incentives, Bond Purchases
Fannie Mae and Freddie Mac, seized by the U.S. during the
closing months of the Bush administration in 2008, have
tightened more than a dozen mortgage qualifications since then,
including those for down payments and credit scores. The
restrictions come after the government handed out $16.2 billion
in homebuyer tax credits to pump up demand and the Federal
Reserve bought more than $1 trillion of mortgage bonds to lower
borrowing costs.
The Fed on June 22 lowered its estimate for 2011 economic
growth to a range of 2.7 percent to 2.9 percent from the 3.1
percent to 3.3 percent it projected in April, citing the
residential real estate market as a factor. Housing is “a big
reason that the current recovery is less vigorous than we would
like,” Chairman Ben S. Bernanke said in a speech last month.
“The government is working at cross-purposes,” said Doug Bandow, a senior fellow at the Cato Institute, a libertarian
policy-research center in Washington. “There’s been a desperate
attempt to reinflate housing by throwing money at the problem.
The worst time to tighten lending is after doing that.”
Lending for mortgages to buy homes probably will drop to
$432 billion this year from $473 billion in 2010, according to a
forecast last month by the Mortgage Bankers Association in
Washington. In January, the trade group predicted a rise to $616
billion, which would have been the first increase since 2005.
The association now forecasts the gain will be in 2012.
Fannie, Freddie Standards
Banks tend to follow Fannie Mae’s and Freddie Mac’s
requirements for lending because they set the standards for
loans they guarantee, purchase and package into bonds. The
companies, along with the Federal Housing Administration, back
about 90 percent of loan originations.
Nine out of 10 mortgages bought by Fannie Mae in the first
quarter were held by borrowers with credit scores higher than
700, according to regulatory filings. In 2003, the share was 68
percent. Credit scores, developed by Fair Isaac Corp., range
from 300 to 850.
Higher loan requirements have displaced about one-third of
people who might have gotten mortgages in the years before a
collapse in credit quality led to the subprime crisis, Bernanke
said at a June 22 news conference. That’s an “important
problem,” he said.
Screening Out
“We screen out about 30 percent of the people who call
looking for a mortgage, usually because of their credit
scores,” said Michael D’Alonzo, president of Creative Mortgage
Group in Maple Glen, Pennsylvania, and head of the National
Association of Mortgage Brokers in Plano, Texas. “A lot of
people don’t even try, because they’ve heard horror stories of
how hard it is to get a loan.”
Home sales tumbled in three of the past four months even
with properties at their most affordable level in a generation,
according to the National Association of Realtors. Real estate
prices in 20 U.S. cities fell 4 percent in April from a year
earlier, the biggest decline since 2009, the SP/Case-Shiller
index showed last week. Pending home sales, a measure of signed
contracts, rose 8.2 percent in May, not enough to erase the
prior month’s 11 percent drop, the Realtors said June 29.
Americans are still interested in buying residences, a sign
that tighter loan standards are limiting sales. In May, 5.5
percent of people said they wanted to purchase a home, a record,
according to the Conference Board, a New York research firm.
Sales Decline
Government efforts to bolster housing so far have had hefty
price tags and mixed results. While the homebuyer tax credit of
2009 and 2010 initially increased transactions, sales dropped to
a record low in July, three months after it ended.
The credit cost $16.2 billion in lost tax revenue, data
from the Government Accountability Office in Washington show. It
resulted in 1 million sales that wouldn’t otherwise have
occurred, according to an estimate by the Realtors association.
“Most of the sales affected by the tax credit were most
certainly a change of the time of the purchase, not a change in
the decision to buy,” said the Cato Institute’s Bandow.
The most successful program was the Fed’s drive to lower
interest rates by purchasing bonds, starting with $1.25 trillion
of mortgage-backed securities in 2009 and 2010, said Mark Zandi,
chief economist at Moody’s Analytics Inc. The average rate for a
U.S. 30-year fixed loan fell to 4.17 percent in November, the
lowest in records dating to 1971, according to Freddie Mac.
Better Than Nothing
“Some of the government’s efforts to stimulate the housing
market have been more successful than others, but it’s hard to
imagine what would have happened if it had done nothing,” said
Zandi, based in West Chester, Pennsylvania.
Bernanke has signaled that some of the blame for the
housing morass may be on the government’s foreclosure-prevention
plan, the Home Affordable Modification Program, or HAMP.
“I’d like to see further effort to modify loans where
appropriate, and, where not appropriate, to speed the process of
foreclosure and disposition of the foreclosed homes in order to
clear the market,” he said.
HAMP has fallen short of expectations. When President
Barack Obama announced the program in 2009, he set a goal of 3
million to 4 million modifications by the end of 2012. Of the
1.6 million trial plans started since then, 608,615 have turned
into permanent modifications.
Higher Foreclosures
“We’ve managed to keep a lot of people in their homes and
alleviated a lot of suffering,” said Timothy Massad, acting
assistant secretary for the Treasury Department’s Office of
Financial Stability. Without the government programs, “you
would have had a higher rate of foreclosures and foreclosures
are not in anybody’s interest,” he said.
In some cases, modifications have only prolonged the pain
by giving second chances to people who later end up in default,
said Arizona Attorney General Tom Horne, a Republican. About a
third of new foreclosures are loans that have defaulted after
modifications or the borrowers caught up on payments, according
to Lender Processing Services Inc. (LPS)
“I’d like to see government get out of the real estate
business entirely,” said Horne. “The market can find its way
all on its own.”
2.2 Million Homes
There were 2.2 million properties in foreclosure in May,
according to Lender Processing, a Jacksonville, Florida-based
company that provides loan-servicing software. Another 1.9
million mortgages were delinquent more than 90 days, the point
at which foreclosure proceedings typically start.
Lenders are delaying home seizures as all 50 state
attorneys general investigate the industry’s foreclosure
practices. The probe, begun late last year, follows allegations
of shoddy practices such as robo-signing, or using workers with
little or no training to sign thousands of documents filed in
support of foreclosures without reading them.
Horne declined to comment on the investigation. Iowa
Attorney General Tom Miller, the Democrat leading negotiations
for the states, said last month that officials are making
progress in the talks. He didn’t return phone calls seeking
comment.
Bank seizures and notices of default or auction dropped in
May to the lowest level in almost four years, according to
RealtyTrac Inc., a real estate data company in Irvine,
California. Delays in working through the inventory may postpone
a recovery by preventing home prices from reaching a bottom.
“The only way out is to let the market take the hit and
then move on,” said Cato’s Bandow.
Increased Restrictions
For prospective buyers, Fannie Mae and Freddie Mac
mortgage-qualification rules have been changed to include lower
debt limits, bigger down payments and restrictions on the
financing of condominiums, along with the higher credit scores.
“We don’t believe the pendulum has swung too far given the
changed landscape of mortgage risk,” said Doug Duvall, a
spokesman for Freddie Mac in McLean, Virginia.
Fannie Mae has implemented “the right standards to help
stabilize the housing market,” said Amy Bonitatibus, a
spokeswoman for the Washington-based company.
The FHA, with down-payment requirements as low as 3.5
percent, has also been raising the average credit score for its
mortgages. The average credit score for FHA loans to purchase
homes was 701 in April, up from 669 three years earlier,
according to government data. The loans now account for about a
third of new mortgages, five times the size of its 2007 share,
according to the Department of Housing and Urban Development.
Tax Dollars
Stricter standards are necessary to reduce risk for the
government and, ultimately, the taxpayers, said Frank Pallotta,
managing partner of Loan Value Group, a mortgage-consulting firm
in Rumson, New Jersey. The U.S. rescued Fannie Mae and Freddie
Mac from insolvency after they had invested in subprime
securities as a way to meet their Congressional mandate to
support affordable housing.
“It’s kept some people out of the game, but in this
market, with falling prices, you don’t want everyone in the
game,” Pallotta said. “It’s our tax dollars on the line.”
By the time borrowers get to their local banks, the
standards may be even higher, said Mark Goldman, a loan broker
with C2 Financial Corp. in San Diego. Lenders want to prevent
mortgages from being returned by Freddie or Fannie, so they
exceed the rules — a safety cushion called an overlay.
Little Tolerance
“Lenders are scared, so they’re going to have overlays,”
Goldman said. “What you get, as a result, is the most
conservative underwriting in 20 years.”
Stamper, in Sacramento, knows that. She missed some credit
card payments after a car crash with an uninsured driver last
year, and the financial history she described as “near
perfect” took a hit. The so-called risk premium fees Fannie Mae
and Freddie Mac charge for credit scores under the mid-700s,
which can add 3 percentage points to rates, put her dream of
buying a home out of reach.
“Clearly the market was too easy during the housing
boom,” said David Berson, the former chief economist of Fannie
Mae who now holds that position for PMI Group Inc. (PMI) in Walnut
Creek, California. “It is almost certainly too tight now.”
To contact the reporter on this story:
Kathleen M. Howley in Boston at
kmhowley@bloomberg.net.
To contact the editor responsible for this story:
Kara Wetzel at
kwetzel@bloomberg.net.
Article source: http://www.bloomberg.com/news/2011-07-06/housing-recovery-hindered-in-u-s-as-government-works-at-cross-purposes.html