Despite the opinions of many that low-down-payment mortgages didn’t cause the housing crisis, the fact is that these types of loans did contribute mightily to the bubble that burst.
However, I do agree that it wasn’t stated income, reduced documentation, poor underwriting requirements, or even subprime loans that caused the crisis — it was the combination of all the above, plus low-down-payment loans, external forces, and more that caused it.
Be clear on this, too, however. Much of these “external forces” were caused by government pressure on lenders to provide low-down-payment loans to low-income buyers — significant pressure that began under the Clinton administration and continued on during the Bush years. And, it was unnecessary government intervention that created the protracted recession and stagnant housing market from which we have yet to recover.
Beyond the Fed’s pressure, of course, outright greed emerged from many quarters as demand for real estate shot up when prices skyrocketed: Too many lenders, loan officers, real estate practitioners, and even many homeowners all pretended that housing prices would continue to rise despite the law of gravity, and became greedy with so much money being poured into the economy in general and the housing market in particular.
What should we all have expected to be different? Individuals and families were being offered low-down-payment mortgages on homes they could not ultimately afford. Others were given loans if they “stated” they had incomes that they clearly did not. Still others got a loan if they passed the “foggy mirror” test.
With protestation from many who say that the FHA and VA have been insuring 3.5% and 0% down-payment loans respectively for many years with little negative impact, this belies the fact that the FHA has dramatically increased its presence in the marketplace in recent years and those loans will be among the easiest to walk away from when the housing market shifts from its stalled condition to the downturn that many economists and analysts have been predicting will occur beginning in 2015.
Additionally, with the announcements that Fannie Mae and Freddie Mac will soon start offer programs on mortgages with as little as 3% down payments, this portends bad news for the future, as does the discontinuation of quantitative easing, which will push interest rates upward.
Oh, sure, we are told that underwriting guidelines and other safeguards are now in place that will prevent another bubble from bursting. And, after all, we now have the CFPB riding herd on lenders and servicers. But what about nonbank mortgage lending, which is growing exponentially. Is the CFPB going to target them, as well? Once these low-down-payment loans proliferate, I submit that the pendulum will swing too far again.
Another “truth” that deserves mention here is the fact that, yes, the housing market is also stalled because not enough first-time buyers are entering the marketplace. Whether it is the supposed preference by millennials to rent rather than own, the lack of available low-down-payment loans or stringent underwriting criteria, lower-income citizens are not buying in numbers that push other buyers up the real estate food chain. But that does not mean that an increased number of low-down-payment loans should be made. It is a fact that these types of loans contributed to the recent housing crash.
It is my belief that better, higher-paying jobs would help lower-income folks to be in a position to buy a home. And builders should return to building moderately priced and sized homes. Homes were intended to be shelter. Levittown might not have been a “dream community” after World War II, but it was an affordable community for many, many hard-working members of the middle and lower middle class in America. There are more and better solutions than simply making higher risk loans available to almost anyone who wants them.
It is long past time for us to find more creative, financially sound solutions to providing affordable homes and better paying jobs for many more Americans.
Lynn Effinger is a veteran of more than three decades in the housing and mortgage servicing industries. He currently serves as senior vice president-institutional services for RIO Software Solutions Inc.