Watt to Realtors: FHFA Working to Ease Restrictions and Increase Demand

Federal Housing Finance Agency (FHFA) Director Melvin H.rnWatt told an audience of Realtors® today that after some difficult years inrnhousing a much needed conversation about homeownership has finally begun.   The conversation is about both access to andrndemand for homeownership which is one of the primary ways that Americans havernaccumulated personal wealth and is a means for many families to gain stabilityrnand invest in their communities.  </p

Watt, speaking to a National Association of Realtors® (NAR) conference inrnNew Orleans said that conversations on the access side always start with thernavailability of credit and there is a widespread concern that therncredit markets have swung from reckless spending to the opposite extreme wherernonly those with the most pristine credit can get a loan.  This is evidenced by the diminished overallrnmarket for purchase mortgages and the higher average credit scores required byrnlenders across the entire market and within Fannie Mae and Freddie Mac’s guaranteernbusinesses.</p

Watt said his agency, both as regulator of the Federal Home Loan Banks and therngovernment sponsored enterprises (GSEs) Freddie Mac and Fannie Mae as well asrntheir conservator is at the heart of this conversation.  “No one wants to return to the excesses andrnabuses of the past and FHFA is taking steps to ensure that this does notrnoccur.  But the message we have tried to send is that we need to find arnway back to responsible lending to creditworthy borrowers across all marketrnsegments.”      </p

To put the access to credit conversation in context, he said, there are nowrnall kinds of mortgage lending protections in place that could well havernprevented the earlier abusive lending boom.  The Dodd-Frank Wall Street Reform and ConsumerrnProtection Act gives borrowers meaningful protections against the kind ofrnmortgages with risky features that resulted in high default rates and helpedrnfuel the housing crisis.  Lenders are now required to determine if arnborrower has the ability to repay the mortgage which prevents the no-docrnlending that led to wide-spread losses, and provides critical protection to thernborrower, contributes to the stability of the housing market and is fundamentalrnto safe and sound lending.</p

Recent reforms also restrict other risky mortgage products and practicesrnsuch as subprime teaser rates, prepayment penalties, and incentives for loanrnoriginators to put qualified borrowers into unnecessarily expensive loans.  Dodd-Frank’s Qualified Mortgage standard requiresrnloans to be fully amortizing, meaning no negatively amortizing or interest onlyrnloans; puts restrictions on points and fees, and limits loan terms to 30rnyears.  The GSEs must limit theirrnmortgage purchases to loans that meet these Qualified Mortgage requirements. rn</p

Watt said these reforms establish a solid new foundation for the housingrnmarket to responsibly provide access to credit for creditworthy borrowersrnhowever the current constrained credit environment has resulted in relativelyrnfew borrowers buying houses and benefitting from these protections andrnimprovements.  </p

Both because of an overall cautious approach to lending and because ofrnuncertainty about GSE loan repurchase requirements lenders have focused onrnrefinancing and lending to borrowers with higher credit scores in recent years,rnoften using higher credit score thresholds than those required by the GSEs andrnlocking many potential homebuyers out of the market.  </p

On the demand side of home ownership there are also a number of troubling headwinds.rn Increasingly, millennials – young peoplernbetween 25 and 34 years of age – are choosing to remain renters.  They indicate they hope to own in the future,rnjust not now. Many are getting married and having children later in life thanrntheir parents did, many continue to face economic hardships because they enteredrnthe job market during the Great Recession and student loan debt is impactingrnmany as well.  There are many nuances tornthe last issue Watt said.  Higherrneducation may lead to increased future income for many in this group and,rntherefore, ultimately increase their ability to become successful homeownersrnbut many individuals with student loans are struggling with high debt levelsrnand impaired ability to save for a down payment – both of which make it morerndifficult to qualify for arnmortgage.         </p

Other groups are also facing challenges in accumulating enough money to makerna large down payment and cover closing costs, a particular problem inrncommunities of color.  Average householdrnwealth in general is significantly lower in these communities and they alsornexperienced record losses of wealth during the housing crisis.  The impact of this wealth disparity is likelyrnto have a growing impact on the future housing market since people of color arernprojected to account for approximately 70 percent of the increase in number ofrnhouseholds over the next decade.  </p

Demand is also limited by persons who lost jobs or say incomes diminish duringrnthe recession and then lost their homes as well.  The damage done to the credit of many will constrainrntheir ability to return to homeownership.  There also appears to be arnhard-to-measure psychological impact on many who watched their friends or lovedrnones lose their homes or suffer financial hardship in the housing crisis andrnwhich may deter them from entering the homeownership market.   </p

There is no lack of rational explanations for why demand for homeownershiprnis down, Watt said, and while it won’t happen overnight, “It is my hope thatrnmany creditworthy individuals and families who are currently renters – but havernthe ability to pay a mortgage and become homeowners – will have the opportunityrnto pursue homeownership and will decide to do so.” </p

The recent reforms and the responsible lending practices that are emergingrnfrom them will provide predictable mortgages that borrowers can afford and havernthe ability to repay.  Coupled with home prices that remain low in manyrnlocations and low interest rates “now is a great time for realtors to bernactively encouraging their customers who can afford it to become homeowners,” therndirector said.

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