Mortgage money is the lifeblood of the single-family housing market. Sure, there have been a lot of cash buyers in the market in recent years. This is an aberration, not the norm. Most Americans who want to buy a house need a sizable mortgage to make the purchase.
The availability of mortgage money to potential homebuyers swings like a pendulum. In 2006, the pendulum swung too far. It was too easy to get a loan. Buyers with poor credit and undocumented stated income could get a 100 percent loan. I was calling this phenomenon “a grand social experiment.” Unfortunately the experiment was a spectacular failure.
In reaction to the failure of the experiment, the pendulum swung too far the other direction. Dodd-Frank regulation was created to protect us from ever having a bad mortgage experience again. Unfortunately it took government regulators years to write the hundreds of rules that they deemed necessary. Now that a lot of the rules have been written, mortgages are still hard to get for many Americans. Of course, if you have a great job with substantial income and a sizable cash down payment you can still get a mortgage.
But what if you have some debt on a car or a student loan? What if you only have 3 percent for a down payment? That’s been a tougher story.
Well, some good news in the mortgage market means it is likely to be easier for a larger portion of Americans to buy a house in coming months.
The first piece of good news came from Mel Watt in the Wall Street Journal last month. Mr. Watt is the newly installed conservator overseeing Fannie Mae and Freddie Mac (FRANNIE). On May 13, he announced he is going to encourage FRANNIE to make more credit available to homeowners. He is going to encourage them to accept mortgages with smaller down payments. He is also going to encourage FRANNIE to provide banks with more clarity about what triggers mortgage “put-backs.” A put-back happens when a bank creates a mortgage loan, sells it to FRANNIE, and then the loan goes bad. Under some circumstances, FRANNIE can make the bank take the loan back. This has caused banks to be very risk-averse in making new mortgage loans.
The second piece of good news has to do with Connecticut Avenue securities. When Fannie Mae buys mortgages every day, did you ever wonder where they get the money? They sell bonds to investors and use the money to purchase mortgages. If bond investors are skittish about the risk of mortgage loans, they may not want to buy Fannie Mae bonds. So Fannie has to be very conservative in its decisions.
In a recent article, the Wall street Journal reported that Fannie Mae was able to sell risk-sharing certificates that enlist investors to pay for potential defaults on home loans guaranteed by Fannie Mae. They are called Connecticut Avenue securities because Fannie Mae has an office on that street.
Here is the cool thing about this second piece of good news. The riskiest of these securities are linked to home loans with as little as 3 percent down payments. And how did the sale of these risky securities go? It was oversubscribed by 19 times. That means that these investors would have bought a lot more of this paper. This tells us is that the bond investor appetite for riskier home mortgages with small down payments has grown substantially.
Here’s the good news. First, the head of FRANNIE is saying he wants to make home loans available to buyers with smaller down payments. Second, bond investors are saying they are keenly interested in buying parts of mortgages that have small down payments.
Expect to see more Americans buying homes with smaller down payments coming soon to a lender near you.
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