Why You Should Care What the Federal Government Does About Lending

by Citadel Escrow Team

Why should you care how the government regulates mortgage lending? Taking a look back into the history of lending will begin to give you that answer.

The beginning – FHA, FNMA, and the GI Bill

In 1934, the FHA (Federal Housing Administration) was established, creating first 20-year,government-building then 30-year mortgages. Prior to that time, lending for home purchases was by private banking only, usually with a five-year note which was callable at any time. The FHA enormously expanded the ability for people to own homes and share in what was always a principal part of the American dream. In Depression-era 1938, Fannie Mae (Federal National Mortgage Association) was begun to provide a secondary market for lenders to sell their loans and recapture their capital to re-lend to other homebuyers. In 1944, the GI Bill (Servicemen’s Readjustment Act) was passed and offered veterans low-interest loans for starting businesses, buying homes, or extending their educations. These three events – FHA, FNMA, and GI Bill – along with the revenue generated by wartime production and growth – stimulated the economy toward the comfortable and expanding 1950’s. People began to own homes, two-tone cars or even two cars, modern kitchen appliances, and their dream of “suburban life”. The Donna Reed lifestyle was firmly in place.

Ginnie Mae and Freddie Mac

In 1968, Fannie Mae became publicly traded and was partitioned into two entities, FNMA to deal with FHA and VA loans, and Ginnie Mae (Government National Mortgage Association) to provide insurance for bonds issued by FHA/VA mortgages in special affordable housing programs. Today Ginnie Mae securities are the only mortgage-backed securities backed by the “full faith and credit” guaranty of the U.S. government. In 1971, Freddie Mac (Federal Home Loan Mortgage Corporation) was created to provide a secondary market for lenders of non-government-backed loans to increase capital flow. It became publicly traded in 1978, and Moody’s rated the preferred stock A-1 until 2008.

The “Bubble” Hits

Then came all that trouble – derivatives of all kinds, creative securities, and a lot of independent pressures on our economy. It is important to know that Fannie and Freddie did not cause the “bubble”. Private label securities defaulted 3-5 times as much as Fannie and Freddie. The bubble was a result of poor regulation in a wildly “creative” financial market, lower interest rates, faulty beliefs, and a race to the bottom.

Current Proposed Legislation to Eliminate FHA and FMAC

It is reasonable to assume that government legislators know little or less than their constituents. The US Senate is considering legislation which would eliminate FHA and FMAC, the most stable secondary market we have seen historically, or to severely restrict those programs to low/moderate prices only, to reduce loan limits, to increase down payment requirements, interest rates and guarantee fees, to institute mandatory risk-sharing so that if one element fails it costs all the elements, and to reduce guarantees. Proposals are to make loans only for people with 20% down payments or more and at least a 760 FICO score. Going from a 3-1/2% down payment to a 5% down payment is estimated to cost borrowers an additional five years of saving. 20%? Can you imagine the effect in California!?

Thirty-year fixed rates are at risk. ARM’s are smart choices for homebuyers who know they will be in that place only for a specified 5-7-10 years, but that long term offer a floating future. Homeownership is more than pride, security, independence, and roots. It is also a walk to a financial base for those older retirement years. If we have fixed rates, budgeting is much easier. In the past decade, we have all learned that we cannot depend on the government and must prepare to take care of ourselves. If a system in place is thriving, the government is likely to tap in to “share the wealth” with other unsuccessful programs.

Housing is a basic want, need, and dream. We need to protect it.

Cheers,
Citadel Escrow Team

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