Saying that the country’s tentative housing rebound is “leaving too many people behind,” the president and his administration have announced that they will be “working to get banks to lend to a wider range of borrowers by taking advantage of taxpayer-backed programs…that insure home loans against default.” Part of the process includes convincing the Justice Department to reassure banks “that they will not face legal or financial recriminations if they make loans to riskier borrowers”. The attempt to bring in new borrowers centers around the use of federal programs that have heretofore been used to help underwater homeowners refinance their homes at today’s low interest rates. While these programs have arguably been successful at keeping many homeowners that might otherwise have defaulted in their homes, they have not previously been available to new homeowners. Officials say that lenders could be using the same “more subjective judgment” used for underwater refinancing to also originate new loans.
Not surprisingly, a lot of lenders and analysts are very concerned about the new initiative from the administration. “[It] would open the floodgates to highly excessive risk and would send us right back on the same path we were just trying to recover from,” warned Fannie Mae executive Ed Pinto. The administration has responded that it is not seeking careless lending, only “safe lending to borrowers who have the financial wherewithal to pay.” One senior administration official attempted to clarify the president’s goals by saying that he simply wants “clarity and rules of the road” without “the kind of irresponsible lending that we saw in the mid-2000’s.”
Clearly, the Federal Housing Administration (FHA) is hedging its bets and believes that the writing on the wall could be directing lenders toward risky lending practices. The FHA raised insurance premiums for the third time in two years on the first of this month, potentially adding hundreds of dollars to some borrowers’ monthly mortgage payments and hoping to increase its insurance fund, which was hard-hit by the housing crisis. Starting in June of this year, the FHA will also require borrowers to pay mortgage insurance for the life of their loans regardless of the loan-to-value ratio. Previously, FHA loans did not have to carry mortgage insurance once borrowers had paid down the loan to a certain point. The changes will raise typical monthly mortgage payments on a $200,000 loan to more than $200 a month.
Do you think that the administration’s new approach to lending is a good one? What might it mean for our housing “recovery?”