Mel Watt has been the government’s manager of mortgage giants Fannie Mae and Freddie Mac for only a year, but his efforts to boost access to home loans over the past 12 months have the incoming Republican majorities in Congress concerned.
Even as credit remains historically tight, Watt’s actions have provoked fears that he is leading the mortgage giants down the same path that led them to fail in 2008 and receive massive taxpayer bailouts.
Since taking the reins of the Federal Housing Finance Administration last January, Watt has taken a number of steps designed to make it easier for more consumers to gain access to home loans. Those include putting off a fee increase on the insurance that Fannie and Freddie provide on mortgage-backed securities, planning to back loans with down payments as low as 3 percent, and, most recently, directing money toward an affordable housing trust fund decried by conservatives as a “slush fund.”
That last move drew the promise of a congressional oversight hearing from House Financial Services Committee Chairman Jeb Hensarling, who called it a “lump of coal in the stocking of every American taxpayer.”
The problem facing Watt is that he has more influence over the U.S. housing market than anyone intended. Federal agencies, led by the FHFA, now dominate the housing finance system in the wake of the collapse of the private market.
That means Watt bears responsibility for credit being “tighter than it’s been for a very very long time,” said Laurie Goodman, director of the Housing Finance Policy Center at the Urban Institute, a Washington think tank.
Statistics on loans backed by Fannie and Freddie show the difficulty of getting a mortgage. The average FICO score on loans backed by the government-sponsored enterprises is 757, according to Black Knight Financial Services, up from about 730 in 2005. Loans recently bought by Fannie and Freddie are the best performing by far, with only 1.4 percent delinquent versus 12.2 percent at the end of the bubble years of 2007 and 2008.
Even those measures, however, might not give a good indication of how tight credit is, Goodman said, noting that metrics based on credit scores or surveys of lenders might have missed the disastrous loosening of standards during the bubble years.
In December, the Urban Institute developed a Credit Availability Index to gauge the true state of lending standards. The index takes into account both the riskiness of the borrower and of the mortgage product the borrower uses — a methodology that would have flagged the proliferation in no-down payment and unconventional loans in the mid-2000s.
The index shows loan terms quickly tightening in the wake of the financial crisis and then continuing to grow more restrictive through 2013. The picture probably didn’t change much during 2014, Goodman said, although Watt’s actions have helped reverse the trend. “It’s a bunch of little things, each of which has to be dealt with,” Goodman said of FHFA policy.
Perhaps the biggest of those steps is simply rebuilding trust with lenders that if they play by the rules, they won’t be punished by regulators, either by litigation or by being forced to buy back nonperforming loans.
“What we’ve created since the beginning of the recession is the most extraordinary labyrinth of regulation and oversight,” said David Stevens, the head of the Mortgage Bankers Association.
The fear of unintentionally running afoul of that system has left lenders unwilling to take prudent risks in lending, Stevens said.
That dynamic “doesn’t impact the wealthy, salaried homebuyer with a sizable down payment and a long credit history. Who it does impact is anyone I would describe as having a story to tell,”said Stevens, including people with unusual income or credit histories, such as consultants or contractors.
Those would-be borrowers are held to far higher standards by lenders who say they’re afraid that a mere clerical error in the documentation could result in them assuming the liability for a bad loan bought by Fannie or Freddie.
In other words, the efforts undertaken by the FHFA and the Consumer Financial Protection Bureau to prevent the kinds of abusive no-documentation and no-down payment subprime loans that led to the housing crisis have left lenders unable to exercise judgment when it comes to creditworthy borrowers with marginal scores.
Last year, Watt announced efforts to clarify the terms that would and would not result in penalties for lenders. That move has some banks saying they will reduce the stringent requirements they place on applicants, a move that should ease credit.
Early in 2015, Watt will face major decisions regarding whether to push ahead with more efforts to ease credit. Those include making a decision on the guarantee fees Fannie and Freddie charge for insurance, and the two businesses’ affordable housing goals.
Yet some conservative critics believe that Watt’s decisions ultimately will lead to a reprise of the deterioration in credit standards that led to the crisis, even if credit is tight right now.
“He’s taking whatever mortgage credit’s available and subsidizing less creditworthy borrowers,” said Douglas Holtz-Eakin, president of the American Action Forum right-of-center think tank. “That is qualitatively the same mistake that was made going into the housing crisis,” he said, although he noted it is not occurring on the same scale.
Although credit is tight, he said, “Fannie Mae and FHFA can’t jump-start the market.” He added, “I never thought that the housing market recovery was going to drive the economic recovery, I thought it was the reverse.”
