Mortgage Giants to Rescue U.S. Real Estate Market

by John M. Curtis
(310) 204-8700

Copyright May 15, 2014
All Rights Reserved.                                     

            Proving that Wall Street can’t save the U.S. economy, the housing market holds the keys to the economy, currently dragging the country dangerously close to a double-dip recession.  Wall Street rallies often lead the economy out of recession as it did since the Great Recession ended in 2009 when the Dow Jones Industrial bottomed out March 6, 2009 at 6,443, signaling a new bull market that’s run all the way through today’s close of 16,446, over 10,000 points in four years.  Rallying four years, Wall Street has generated a pile of capital gains for the economy, cutting the federal budget deficit from $1.4 trillion to about $500 million, largely stemming from improved employment numbers.  When you look at the nation’s Gross Domestic Product flat-line in the first quarter, 67-year-old Federal Reserve Board Chairman Jane Yellen vows to keep the economy from going into a double-dip.

             Bull markets only last so long if real economic growth isn’t matched in the  economy, including consumer spending needed to promote the necessary growth that expands the nation’s GDP.  Since the Great Recession, jobs growth hasn’t fueled enough consumer demand, forcing manufacturers, domestic and foreign, to keep enough goods-and-services to meet consumer demands.  With Wall-Mart—the nation’s biggest retailer—forecasting second quarter profits well below expectations, it spells trouble for the retail sector, a sure sign the economy is losing steam.  Yellen sees an anemic housing recovery as responsible for weak jobs growth, poor consumer spending and slow GDP growth.  Pointing to difficulty with loan origination, Yellen has asked housing giants Fannie Mae and Freddie Mac to come up with new lending guidelines to improve the rate of homeownership.

             Since the 2007-08 housing crash, federally regulated lending agencies, including Fannie and Freddie, imposed such over severe lending standards that it reduced loan originations by over 60% from 2013.  Without middle class borrowers qualifying for home loans, it difficult to fuel a real estate recovery on only cash sales.  First-time buyers and homeowners seeking to trade-up in the real estate market, need reasonable mortgage financing.  While there’s nothing wrong with rooting deadbeats out of the housing market, there’s something very wrong when self-employed individuals with high FICO scores can’t qualify for mortgages because they don’t meet federal lending guidelines.  Yellen has proposed reducing the down-payment requirement from its current 20% to 10%, a immediate way to make it easier for borrowers to qualify.  But much more is needed to fix the current problem.

             Federal authorities must change the notorious debt-to-income ratio that prevents borrowers from originating mortgages and refinancing.  Yellen believes the real estate market is so integral to the U.S. economy that it’s necessary to find easier ways for borrowers qualify for conventional and jumbo home loans without jeopardizing the entire lending system like the housing crash in 2007-08.  Fannie Mae and Freddie Mac’s current regulator Mel Watt wants the federal agencies to ease risks to banks on federally insured home loans.   Watt wants the two federal agencies to securitize home loans for lending institutions, making it easier for borrowers with lower FICO scores and lower debt-to-income ratios to qualify for mortgages.  Under Watt’s leadership, Fannie and Freddie have paid back $187 billion in federal bailout funds borrowed from to stave off insolvency in 2008.

             Working with Yellen, it’s possible for Watt to set new down payment, debt-to-income ratios and FICO scores to qualify for federally insured loans.  Today’s overly stringent lending guidelines, a backlash from the 2007-08 housing bubble, need to be urgently changed before the economy heads into a double-dip.  Without a strong real estate market, where homeowners make use of home equity lines, consumers don’t have the cash needed to fuel enough consumer spending to grow U.S. GDP.  With U.S. GDP flat-lining in 2014 first quarter, the Fannie and Freddie must act urgently to save the economy.   Wall Street has done everything asked to bring the U.S. economy out of the Great Recession.  Now it’s up of the Fed and federal mortgage agencies to correct today’s overly restrictive lending practices that prevent consumers from originating mortgages and refinancing home loans.  Low interest rates aren’t enough if borrowers can’t qualify for mortgages.

             Pointing her finger at the real problem with the U.S. economy, Yellen identified the housing market as the drag on the economy.  Yellen and Watt have been honest about the lending problems behind the current real estate slowdown.  While it’s tempting to blame the problem of high interest rates and inflated home prices, the real problem stems from Fannie Mae and Freddie Mac’s excessively high down payments, unrealistic debt-to-income rations and inflated FICO scores.  As Watt points out, lowering down payments to 10%, reducing FICO scores, and raising debt-to-income rations should have the beneficial effect of stimulating mortgage originations and refinances.  Keeping the status quo assures that the economy heads into a double-dip.  Relaxing federal lending guidelines, especially for the self-employed, should help fuel consumer spending and drive up GDP.