Targeted Mortgage Lending - Who Pays?

Bruce Krasting's picture
Edward DeMarco, the boss at FHFA made the following statement recently:

many decades the federal government has sought to affect housing
finance in ways that promoted the availability of credit for low-and
moderate-income homeowners and renters.
Under the current
structure, the many subsidies granted the Enterprises were exchanged
for various requirements, including housing goals, to ensure the
Enterprises did not ignore these segments of the marketplace. Going
forward, policymakers may consider alternative approaches to defining
and targeting subsidies to achieve public policy objectives. For
instance, subsidies intended to support the financing of affordable
rental units or to assist first-time homebuyers could be more
efficiently targeted through down payment assistance or other measures than by a general subsidy provided to all types of mortgage credit.

has articulated something that I have not seen proposed before. It is
important to analyze the implications of his words.

after administration has used the Washington mortgage lenders as tools
of social policy. The agency's respective charters confirm this. Part
of their mission statements’ is to advance the nations housing
objectives. This was a lovely marriage of interests for many years. It
worked because RE value almost always went up. There weren’t
significant losses until 2008 happened. Mixing high-octane credit with
social objectives was a way of creating Federal off balance sheet
financing. It was a contributor to the bubble in housing. We are paying
a big price today for social policy choices that were made years ago.

has said that that policy has not worked and needs to be changed. That
is a very significant acknowledgement of failure. That he goes on to
propose that down payment assistance instead of 100% mortgage financing
must be considered has potentially far reaching impacts.

DeMarco to comment like this confirms that Fannie and Freddie have a
lot of underwater mortgages that are tied to social housing goals. The
question is, “How big is this problem?” There is no published
information that breaks this out. A starting place for an estimate
comes from a minor announcement from FHFA’s sister in law FHA. The
announcement confirms that the “favored lending” status (Targeted
Lending Initiative or ("TLI") for areas of Louisiana that were impacted
by hurricane Katrina would be extended.

From that document
comes the following graph. The FHA proudly points out that it has made
900,000 loans totaling $111 billion dollars that fall under their
definition of a social objective mortgage. That comes to 15% of their
total book.

one uses that percentage as a proxy for all or the $7.3 trillion of
D.C. mortgages it implies that the social side of this is approximately
$1.1 Trillion. If this level of social lending is to be sustained and
DeMarco’s suggestion that down payment assistance should replace bad
lending standards then is would require an on budget expense of $50
billion a year forever.

That is not in the cards. Not by a long
shot. The days where ‘social mortgages’ are made without equity are
coming to an end. At some point in the future if you want a D.C.
mortgage, you will have to put up 20% of the purchase price. You will
have to get that from savings, friends or family. You might even get it
from your Uncle Sam if you’re lucky, but don't count on it.

long-term implications of this on the housing market will be
significant. More important will be the social implications. We are not
going to pay for the next Katrina with low-interest, no money down
mortgages. We will have to pay up front.

It is good that DeMarco
put this in front of the Senators. Now that it is out it will be
difficult to withdraw. Something will have to change. The lending
Agencies have been geese laying golden eggs for years. Then they
morphed into a Black Swan. We are going to wish we had those geese back.