You might have thought it was a good idea when the government started taking all the profits of the Federal National Mortgage Association (FNMA, or Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC, or Freddie Mac).
After all, the two quasi-private mortgage insurance giants had sucked a lot of profit out of the markets over the decades, and then required over $180 billion in bailout money from taxpayers. Why not get a little of the bailout cash back, right?
Well, we did. As I’ve written lately, the U.S. government has recouped all of the bailout money and then some, to the tune of an additional $40 billion. So far, so good. But now the government, through the Federal Housing Finance Agency (FHFA), which oversees the twin behemoths, has another plan.
As usual with a government plan, this one has a few holes.
In addition to squeezing out every last buck the companies generate and sending it as a gift to the U.S. Treasury, the FHFA wants Fannie and Freddie to back more loans to low-income borrowers and landlords that rent to low-income families.
Since the FHFA is the overseer of these two companies as long as they remain in conservatorship, what the housing agency wants, the agency gets. So we can expect Fannie and Freddie to instruct banks that they will buy loans proportionally, meeting the goals laid out by the FHFA.
At least 24%, or roughly one-in-four, of the loans they buy will be to families that earn 80% of the median income for the area or less. Hmm.
The median household income in the U.S. is roughly $52,000. 80% of that is $41,600. So the government is telling the mortgage giants that a quarter of their new loans have to be to families earning $41,600 or less. Obviously the number is higher in areas where the median income is higher, like urban areas, but the point remains the same.
If this family brings home 100% of its pay – no taxes, no nothing taken out – then it earns about $3,500 per month. If 30% (the industry guideline) of this pay is devoted to housing, then the family can spend $1,050 on their home.
A thousand bucks a month doesn’t buy much of a house.
It’s true that at current interest rates $1,050 can support a $220,000 loan, but that doesn’t include taxes or insurance.
If those costs are on the cheap side at $300 per month, it cuts the funds available for the mortgage to $750, which would support a loan of $157,000.
When the median existing home sale is at $234,000, I wonder where Fannie and Freddie are going to find thousands of new home sales at dramatically lower price points.
And I’m guessing that these new loans won’t include 20% down payments. Instead, it’s much more likely that they will meet the new and improved guidelines of 3.5% down.
If all of this sounds like the housing agency is driving the mortgage giants down the same path that added to the financial crisis of 2008, that’s because it is.
I wonder how Mel Watts, the new director of the FHFA, would explain this to the low-income families that lost their jobs and then their homes during the last meltdown. These people are among the millions that gave up homeownership after watching their savings evaporate.
Maybe he’d say: “It’s OK, it’ll be better this time around.” Or: “These things rarely happen twice.” Unless they had significant savings and very secure employment, it’s hard to see why someone at that income level would risk homeownership in this economy.
If the directives from the FHFA stopped there it would be bad enough, but they don’t. In addition to 24% low-income loans, the agency has also instructed the mortgage giants to target 6% of even lower income loans. This group makes no more than 50% of the median income for the area. At the national average, that’s $26,000.
The problem isn’t that the government wants to encourage home ownership. There’s nothing wrong with that.
The issue is that government officials believe everyone, no matter what level of income they earn, should take on the huge financial responsibilities of owning a home. That’s wrong-headed on the face of it.
Helping people of all incomes save is noble, and good for the economy. Strapping the financial burden of homes to the backs of those least able to afford a setback flies in the face of that goal.
And what happens when these plans go south? Since the mortgage giants have no profits in the bank, they’ll go back to the well for bailouts. Perhaps Mel Watts would tell taxpayers that: “Hey, we made a bunch of money off of them eventually, so what could go wrong?”
As a taxpayer, I don’t see why we need to learn this lesson twice.
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