In the last issue, I wrote about the state of our industry, and opined on volume recoveries, labor and looming materials shortages, and the return to growth in infrastructure spending. But in October, a major policy shift in mortgage lending standards went into effect, which should add additional impetus to the nascent housing recovery. It is a big step forward for housing, and for our industry.
The pendulum of economic sentiment swings both ways. During the middle of the last decade, millions of shoddy mortgages were being packaged and sold, which gave way to the financial implosion of 2008. Out of that came the Dodd-Frank Act, which some blame for the slow housing recovery. But all of that has changed, as the pendulum swings back toward easier mortgage lending standards.
In late October, federal regulators took a big step in that direction, agreeing to drop a requirement that borrowers make a 20% down payment to get a high-quality mortgage. Regulators, conscious that such a move could allow millions of Americans to get a mortgage, finally voted to require only a bank document to demonstrate a borrower’s ability to repay a loan and ensure their debt is below a certain threshold.
At the same time, the federal government announced plans to use Fannie Mae and Freddie Mac to expand credit, rather than reducing their outsize role in the housing market. Those agencies are now planning to guarantee some loans with down payments of as little as 3%. The companies also have defined what kinds of mistakes on loans could result in penalties, a resolution that could lower restrictions on borrowers with weak credit.
These regulatory changes are happening against a backdrop of slowing housing growth. When the policy shift announcement was made, U.S. home sales were down almost 2% from a year earlier. That sluggishness prompted concern in Washington, as officials acknowledged that post-crisis attempts to limit credit may have gone too far.
Exacerbating those worries is the so-called private-label market for mortgage-backed securities, those without government backing. That market is tiny compared to the overall mortgage market, as only $27.8 billion of such mortgage-backed securities were issued last year, less than 2% of the $1.58 trillion in mortgage securities issued in the period. So regulators have moved to ease a rule that critics said could further dampen the private mortgage-backed securities market.
Under a requirement of the 2010 Dodd-Frank law, regulators originally proposed that banks either hold 5% of the risk from the mortgages they package into securities and sell to investors, or require that borrowers make a 20% down payment to get a loan. Regulators have now relaxed the 20% down payment requirement, with officials acknowledging they were sensitive to mortgage industry concerns about the health of the U.S. housing market, and don’t want an extra layer of complexity that could constrain lending. Lenders can avoid holding 5% of the risk as long as they verify a borrower’s ability to repay the loan, and ensure their debt-to-income doesn’t exceed 43%. Loans sold to Fannie and Freddie are effectively exempt from the risk-retention requirement.
These new regulations should help swing the pendulum more toward the center, at a time when the new housing market needs this kind of a boost.