Stop me if you’ve heard this one before, but Fannie Mae and Freddie Mac are lowering mortgage standards. On Monday, the two government-backed housing giants revealed a new program designed to boost mortgage origination among first time buyers and those with low to medium incomes. The new program, which will initially be limited two non-bank lenders, will allow borrowers to include the income of residents that aren’t actually on the mortgage, as well as make it easier for borrowers to include income from second jobs.
While these changes may strike some as sensible, anyone who has seen The Big Short would have valid concerns in the oversight of these looser lending standards – especially when you consider that the companies responsible for mortgage origination will not be the ones holding the mortgages, Fannie Mae and Freddie Mac will. It’s always easier to make loans when you know the taxpayers are the ones that will be holding the risk.
Not only does this program increase taxpayer risk, it does nothing to solve the real issues in the housing market.
While it’s true that America’s home ownership rate is at a 51-year low, this has less to do with current lending standards and has more to do with housing prices rising much faster than household income.
One of the factors contributing to this is interest rate policy, which disincentives traditional savings and has driven would-be savers to look for higher yield investments. With growing concerns about a bubble in stocks, many Americans have turned to housing with investment-home sales increasing 7% in 2015, the first increase in five years.
Given this problem, a sensible solution would be to reverse the Fed’s low interest rate policy and to eliminate various levels of government regulation that make it difficult to build additional housing. But we are not living in sensible times. So government instead for this new lending program that will simply make it easier for some families to borrow money for a house whose price may be artificially high.
Of course while there is reason to worry about history repeating itself in the case of Fannie and Freddie, it’s still not quite as crazy as the FHA’s decision earlier this year to make it cheaper for first-time home buyers with sub-680 credit scores to get into the housing market.
Because the only thing government is worse at than pricing risk, is learning from past mistakes.