The United States government has been very proactive in terms of stimulating mortgage lending activity since the disastrous collapse of the credit markets in 2008. Mortgage interest rates have been pushed down to historical low levels through the Treasury's Operation Twist and the third round of quantitative easing (QE3), which makes the government a major investor in mortgage-backed bonds. Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) now guarantee almost all mortgages originated in the U.S. these days, The White House is very involved in foreclosure prevention and mitigation programs.
The White House is now involved in trying to convince mortgage lenders that relaxing their tight credit guidelines and requirements will not get them in trouble in the future. Banks are satisfied with the current wave of refinancing as well as with the increased home purchasing activity by investors and home buyers with flawless credit histories, but the White House is concerned about what could happen once mortgage interest rates rise in the future. The current housing market does not accommodate too many first-time home buyers, and this is prompting Treasury officials and financial analysts to ponder how this can be solved.
Letting the Market Run Its Course
A recent article in U.S. News and World Report quoted Federal Reserve Governor Elizabeth Duke's opinion that the current mortgage lending market is focused on providing streamline refinance applications to borrowers with excellent credit and sufficient income. Purchases are also being accommodated, but only at terms that leave lenders with almost no risk.
These easy, no-risk refinance and purchase applications are bound to run out soon. When they do, the mortgage lenders are going to be left looking at purchase-money applications from scores of first-time home buyers with less-than-perfect credit histories, modest income and low down payments. Will they be able to say not to these applicants, even with home loan guarantees from Fannie, Freddie and the FHA?
Relaxing Standards at the Top
According to Tim Manni of U.S. News, relaxing the lending guidelines should be accomplished with the reform of Fannie Mae and Freddie Mac. This will not be easy, since the two government-sponsored entities are busy repaying American taxpayers thanks to profits made on providing guarantees to borrowers who meet their standards. Fannie and Freddie would have to adjust their standards in order for mortgage lenders to follow.
Another proposed solution related to the potential overhaul of Fannie and Freddie is to allow the participation of private mortgage guarantors. This would enable market dynamics to develop, which eventually foster competition and allow more credit to be extended to average borrowers; this is another version of letting the market run its course.