Targeted Housing Investments: Responding to NAR's Call for Looser Mortgage Credit
There’s an old adage that seems to sum up the National Association of Realtors’ position on agency underwriting policies – “if you’re already wet, you might as well go in the deep end.”
In other words, if the government is going to continue insuring a relatively narrow band of mortgages in this market in an effort to maintain modest liquidity and preserve asset prices and values – why not insure a wider band of mortgages and have a greater impact on asset values and the housing market as a whole?
The Federal Reserve is doing its part to increase asset prices through initiatives like QEI and QEII, but critics argue that flooding the market with more liquidity at a time when most consumers are not in a position to borrow more, may not have the intended effect. After all, businesses are relatively flush with capital but remain reluctant to re-invest under current conditions. So maybe NAR is onto something...
I believe that credit policy and targeted investments and subsidies would have far more impact in supporting the housing market than cheaper credit which is only available to a narrow band of borrowers.
Currently, the most vulnerable and needy candidates deal with a patchwork of onerous and confusing underwriting guidelines from housing counselors, servicers, housing agencies, and Fannie Mae and Freddie Mac. The unintended consequences of current interest rate and credit policy is that the borrowers that are benefiting are already in a relatively comfortable financial position – that’s why they qualify! Unfortunately, the group of borrowers most in need of lower funding costs or flexible guidelines continue to run head first into qualification barriers.
Homeownership rates continue to slide and aren’t expected to stop anytime soon. According to a recent study by the Mortgage Bankers Association, 1.2 million households were lost from 2005 to 2008, despite the population increase of 3.4 million in the study area. This decline in household formation is one of the major components that contributed to the excess supply of apartments, condos, and single-family homes on the market. Given that buying a home is the most affordable its been in 27 years (based on the affordability index,) it’s reasonable to think that credit policy is standing in the way of a robust purchase market.
There are tremendous direct and indirect benefits, social and economic, to increasing home sales and the homeownership rate. Remember that 14-20 percent of economic activity is related to housing and new home construction. Plus, the children of homeowners are smarter, better educated, and live a safer life than those of renters. Furthermore, neighborhoods are more valuable when the owner occupancy rates increase and local infrastructure gets much needed funding (schools, police and fire departments, etc.) THE SOCIAL BENEFITS OF HOMEOWNERSHIP
I do not, however, believe the government should subsidize the risk premiums for expanded credit policy. Quite the contrary, I think the risk premiums charge by the GSEs and FHA should more than adequately cover the government’s exposure and invite competition from the private sector.
READ MORE: Denationalizing Housing in America. Calling on the Private Sector