Despite the severe economic downfall left behind by the bursting of the housing bubble, home ownership remains as one of the tenets of the American Dream. For many first-time homeowners these days, however, fulfilling that portion of the American Dream is becoming increasingly difficult due to strict mortgage lending guidelines and requirements. This is an issue that the White House wants to alleviate.
According to a recent article in the Washington Post, White House economic advisers and analysts have briefed President Barack Obama on the scores of potential first-time home buyers who are being left out of the ongoing housing market recovery. As a result, President Obama mentioned the issue during his last State of the Union address. White House officials are now looking for ways to twist the arms of mortgage lenders who worry that relaxing their credit and underwriting guidelines could expose them to greater risk.
Limiting the Liability of Mortgage Lenders
Housing officials have approached the U.S. Justice Department to implement a way to ensure that banks will not be subject to legal action if they extend mortgage loans to risky borrowers that end up in delinquency, default and foreclosure. This is a departure from the public sentiment in the aftermath of the collapse of the U.S. housing markets, when many Americans wished for the criminal prosecution of reckless mortgage investors and originators who played fast and loose with subprime mortgages.
What the White House is looking for is a way to convince mortgage lenders to adopt guidelines similar to those used by the Federal Housing Administration (FHA). One of the supporting points in this argument is that banks are already being exposed to risk when they modify underwater mortgages, although most of those modifications are a result of the National Foreclosure Settlement Agreement of 2012.
An Artificial Housing Recovery
According to the National Association of Realtors (NAR), only 30 percent of home purchases these days are made by first-time home buyers. The current housing market recovery is being spearheaded by real estate investors, speculators and individuals who enjoy stable employment, earn income that is above average, have enough savings to qualify as cash reserves, and also have excellent credit. This means that many working and middle-class borrowers have been left out of the housing market.
A recent study by the Federal Reserve Bank determined that the number of home buyers with credit scores between 620 and 680 has declined by 90 percent since 2007. Even those who have decent credit and stable income are often required to come up with a down payment as high as 25 percent of the purchase price. Even though the FHA tries to accommodate borrowers who have been turned down by retail banks, the average credit score of FHA borrowers is at 700.
As long as average Americans are kept out of the housing market, the ongoing recovery could be considered to be artificial and unsustainable. For this reason, the White House is looking for ways to improve the outlook of homeownership in the U.S.