The current government under President Biden’s helm has advocated for more accessible home loan options catering to high-risk borrowers, a move that could magnify the danger of defaults due to rising housing prices. This information is coming in from the experts who discussed the matter with the Daily Caller News Foundation. This aim has been pursued through various measures introduced by government-linked corporations Fannie Mae and Freddie Mac, which are regulated by the Federal Home Financing Administration (FHFA). Altogether, these tactics are costing the higher-risk borrowers less and compensating by charging the lower-risk borrowers more.
Industry insiders are warning that this could lead to a ballooning amount of debt held by Americans, fueled by government-sanctioned lending. This surge in lending poses a threat, as a proliferation of foreclosures and defaults could potentially cause disruption in the housing market. Jason Sorens, a senior research fellow at the American Institute of Economic Research, speaks of the scenario in terms of a ‘subprime crisis,’ where high-risk borrowers are incentivized to take on debt they may not be able to repay.
Sorens draws concern particularly on the impact of these policies on Fannie Mae and Freddie Mac, whose bottom line could be hit hard. The FHFA’s approach to legitimize and facilitate the process for high-risk borrowers took shape in May 2023, reports from the Congressional Research Service reveal. The new approach adjusted the lending criteria – for instance, borrowers with credit scores ranging from 640 to 659, with a down payment between 15% to 20%, observed their fee rate drop to 2.250% from 2.750%.
However, the borrowers with higher credit scores found their rate increase as a consequence. Those with credit scores from 760 to 779, making the same down payment, witnessed a surge to 0.625% from a previous 0.250%. The escalating home prices had its effects on these enterprises, pushing them to up the ceiling of housing debt Americans can procure through these government entities.
The end of 2023 brought an announcement from the FHFA, stating an elevation in the mortgage limit for single-family homes to nearly $1.15 million in certain regions, a noteworthy leap from the ordinary ceiling of $766,550. This essentially empowers Americans to assume even larger, government-supported loans. A new rule proposed by FHFA, allowing the government bodies to purchase second mortgages, is anticipated to offset its growing expenses and permit more loans to be facilitated towards the lower-income and higher-risk borrowers.
As the first quarter of 2024 closed, the total debt held by Americans hit a record zenith, standing at a hefty $17.69 trillion collectively. A substantial portion of the spike in the first quarter, $190 billion to be exact, was owing to mortgage debt. Following the financial unrest of 2008, the Consumer Financial Protection Bureau set down baseline standards for private lending such that mortgages couldn’t surpass 43% of a borrower’s income.
The FHA, Fannie Mae, and Freddie Mac have been diligently attempting to conform to these standards, but due to their affiliation with the government, adherence isn’t a mandate, allowing them the freedom to extend riskier loans. In 2023, an additional directive was introduced by the Biden administration to deter any ‘racial bias’ in property valuation processes. The administration argued that societal bias was inadvertently causing properties owned by minorities to receive lower valuations in comparison to those owned by white individuals.
This move could potentially elevate the price of a minority of properties, with findings from the liberal Brookings Institute suggesting that most homes in predominantly black neighborhoods are already valued at or even above their selling price. To inject additional liquidity in the housing sector, the Federal Reserve has been purchasing mortgage-backed securities from government housing finance institutions since the 2008 crisis. As of June, the cumulative total had risen to over $2.3 trillion.
Following the financial debacle of 2008, Freddie Mac and Fannie Mae found themselves bailed out by the government and placed in a conservatorship. Their role in fueling the housing bubble – buying up precarious loans – was key. The default of these risky loans led the institutions to take a significant hit, triggering a total collapse of the housing sector. While the current state of the housing system isn’t as volatile as 2008, there’s a caveat: a rise in unemployment figures to around 6% from the existing 4% could leave vulnerable Americans unable to repay their debts, resulting in a possible wave of defaults.
The FHA, recognizing this, took action in 2023, prolonging the period in which mortgage holders have the option to adjust the structure of their payments, essentially kicking the issue down the road. Yet, there is a limit to how often this can happen before the well runs dry, resulting in widespread cost-sharing. As Pinto, an industry expert, put it to the DCNF: ‘Those with good credits are [ultimately] paying for the risk of the poor credits.’
The current government appears to be attempting to abolish risk in an industry where it is a fundamental part of its structure. According to Pinto, foreclosure is an inevitable part of the housing finance system. In the midst of this, housing costs have skyrocketed under Biden’s watch, hitting record highs in March and growing by a notable 6.5% within a single year. Reflecting these unsettling trends, the average 30-year mortgage rate, as of June 6, climbed from under 3% when Biden first assumed office to a staggering 7%.
The FHFA has proposed a potentially disruptive ‘tenants’ bill of rights.’ If enacted, it would cap rents as a percentage of household income, offer free legal representation to tenants, and impose several additional provisions on any property financed by a Fannie or Freddie-backed mortgage. Sorens believes that it would effectively enforce nationwide rent control on a large segment of the multifamily market, which could decrease the availability of rental housing and drive up rents for the majority of tenants.
The Biden administration has yet to make any definitive announcements about limiting rent increases, despite media claims citing nameless administration officials in March suggesting that a plan to prevent more than 10% yearly increase on certain government-subsidized units was underway. At the beginning of 2023, the Biden administration had urged the FHFA to probe into ‘protections and limits on egregious rent increases for future investments.’
Such a development, according to Sorens, would have adverse effects. It could potentially deter business away from Fannie and Freddie, while decreasing the value of properties with government-insured mortgages.