While the economy has been improving since the financial crisis, the housing market has been slow to recover. The White House has proposed a plan to help homeowners refinance their mortgages while Congress has proposed the Housing Finance Reform and Taxpayer Protection Act of 2014 (introduced in 2013) as part of the greater system of housing finance reform with the hopes of boosting the housing market.
Part of the problem with the housing market includes the difficulty prospective homebuyers experience in securing credit to buy homes. As a result of the ease with which unqualified homebuyers could purchase homes prior to the collapse of the housing market, “today, the credit score that the typical borrower needs to get a guaranteed loan is significantly higher than in the past — and higher than we would expect given economic fundamentals.”
Interest rates on mortgages are as low as “4.36% on a 30-year loan” but many lenders are unwilling to provide loans for individuals who have credit histories that would typically meet the qualifications of being approved for a loan. In order to address this problem, the Federal Housing Administration (“FHA”) and the Federal Housing Finance Agency (“FHFA”) have attempted to ensure that creditworthy homebuyers can receive the loans they need to purchase homes.
“The FHA provided assurance that loans that meet their credit guidelines can be originated without fear of penalty and announced additional benefits to borrowers who receive housing counseling services. The FHFA gave new clarity as to the circumstances under which lenders would be required to repurchase defaulted Fannie Mae- and Freddie Mac-guaranteed loans.” Since lenders have been more cautious about who they give loans to, the assurances by the FHA and FHFA were given in part to address lenders’ concerns regarding their obligation “to repurchase mortgages that would otherwise be guaranteed or insured, which would leave them on the hook for losses.”
These reforms are part of a greater system of housing finance reform that Congress and the White House have pursued since the Great Recession. Last year, Congress proposed Senate Bill 1217, the Housing Finance Reform and Taxpayer Protection Act of 2013 (“the Act”) to continue strengthening the housing market. The Act hopes to establish a Federal Mortgage Insurance Corporation (“FMIC”) similar to that of the Federal Deposit Insurance Corporation (“FDIC”). The FMIC will be tasked with the following:
“(1) develop standard form credit risk-sharing mechanisms, products, structures, contracts, or other security agreements that require private market holders of a covered security insured under this Act to assume the first loss position with respect to losses incurred on such securities; (2) provide insurance on any covered security for which any private market holders have assumed the first loss position with respect to losses; (3) establish a Mortgage Insurance Fund; and (4) oversee and supervise the common securitization platform developed by a business entity announced by the Federal Housing Finance Agency (FHFA) and established by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (government sponsored enterprises [GSEs]).”
The Senate Banking Committee, through a bipartisan vote, supported the Act, which was met with applaud and commendation by the White House.
Jason Furman, Chairman of the Council of Economic Advisers, explained to the Real Estate Roundtable in April that part of reforming housing finance includes the “countercyclical role the government can play in moderating the impact and magnitude of severe downturns by ensuring continued access to mortgage credit when private capital flees.” He discussed the concept of “cyclical resilience” which means, “the housing finance system should still provide reasonably-priced mortgages to creditworthy borrowers” even during economic downturns.
All of these reforms and proposals are meant to ensure affordability and access to purchasing homes for creditworthy individuals. These reforms are part of a greater system of housing finance reform, which began in response to the financial crisis, and which will continue until the housing finance system is strong and stable.