Taking a two-pronged approach to housing [VIDEO]
The government has initiated two different strategies in order to spurn the housing recovery, and we could see that continue through 2015.
Stringent underwriting standards have kept many - especially first-time homebuyers - from entering the housing market. This has led to concerns that these tight standards have led to a cooldown in the housing recovery, according to The Washington Post. At the same time, allowing lenders to loosen their lending standards too much could fuel another housing crisis. So the question has become, how do regulators make home loans easier to acquire without spurring another housing crisis?
“Nothing is like a light switch to loosen up lending, but there’s definitely some opening up of the box for borrowers in terms of lower down-payment options,” Anthony Hsieh, founder, chairman and CEO of LoanDepot.com, told The Washington Post. “Some recent rule changes and comments by Mel Watt [director of the Federal Housing Finance Agency] mean that the government and mortgage bankers are at least discussing moving in the proper direction and making it easier for borrowers to get a loan.”
Regulators are faced with making it easier for borrowers to get a loan while not allowing lenders to simply hand them out to everyone. In order to ensure that lenders’ underwriting policies are up to the government’s standards, regulators introduced a qualified mortgage rule a year ago. This rule requires that no more than 43 percent of a borrower’s gross monthly income can go toward their minimum monthly payment on all debt.
However, new rules have also been introduced that will make it easier to get a home. It was recently announced that Fannie Mae and Freddie Mac will begin purchasing mortgages with down payments as low as 3 percent, according to the Providence Journal. Before the announcement, the government-sponsored entities wouldn’t go below 5 percent. The two mortgage-backing firms have slightly differing plans. For Freddie Mac, the program will only be open to first-time home buyers, and will require private mortgage insurance and assistance from a financial counseling program. Fannie Mae will also require borrowers to have private mortgage insurance, the difference is Fannie Mae will also work with individuals who haven’t owned a primary residence in 3 years.
Fueling home-buying in 2015
Chances are that the changes will drive new people to the housing market in 2015. For example, it is widely expected that a wave of millennials will purchase homes this year after some time boxed out of the housing market due to strict requirements for attaining a mortgage. Due to high unemployment rates, strict credit standards and student debt, many people born between 1981 and 2000 simply have not had the opportunity to look into buying a home.
“With mounting school loan debt for millennial buyers, it will take them a bit to ramp up and enter the real estate market,” Meredith Peterson, a realtor with Pacific Union, told Inman. “To get them into the market quicker, we need to see the banks making adjustments to their guidelines to allow for smaller down payments and higher back-end ratios.”
It seems the government’s two-pronged approach to regulating lenders could end up working by bringing more financially responsible millennials into the housing market. And borrowers can do their part to spur home-buying by saving up for down payments and maintaining sold credit scores, as well as shopping around for the best loan. Either way, hopes are that lawmakers strike on a perfect balance between ease of access for home loans, and regulation of underwriting, in order to fuel a healthy housing market.
By: Equity National February 5, 2015 Closing