In October, Fred Watt, the director of the FHFA, announced that he plans to allow 3% down payment mortgages for the many financial institutions that Fannie and Freddie guarantee. He states that his intention is to include more minorities and people who had their savings wiped out by the Great Recession re-enter the housing market. This comes at a time when U.S. homeownership rate has fallen to 64.4% from 69.2% in 2004 as blacks, Hispanics, and first-time buyers struggle to qualify for loans. Is this just more huge mortgage mistakes about to happen all over again? Many think so.
Repeating the Same Mortgage Mistakes Again
Some financial industry executives and lawmakers, Republicans in particular, are calling Watt's move an irresponsible opening of credit floodgates that could contribute to the same mortgage mistakes made before, and another economic meltdown. The chairman of the House Financial Services Committee (Jeb Hensarling) stated that Watt's plan returns to the policies that originally caused the housing crash. He went on to say "an invitation by government for industry to return to slipshod and dangerous practices that caused the mortgage meltdown in the first place and wrecked our economy."
The CEO of home builder Toll Brothers, Douglas Yearley, a New York Stock Exchange traded company, called Watt's plan "a really dumb" idea. Paul Wallison, a former Treasury official under Ronald Reagan and currently at the American Enterprise Institute wrote an article critical of Watt's plan that was widely distributed, including being published by the Wall Street Journal. Part of Wallison's article stated, "Since the taxpayers are still standing behind Fannie and Freddie, it's clear who will have to pay the bill when these mortgage mistakes result in defaults in the future."
The director of Housing Finance Policy for the Urban Institute in Washington, Laurie Goodman, believes lowering the down payment requirement and keeping the other rules in place is a good first step in expanding the number of people qualifying for home loans.
One of the important rules that applies to low down payments is the requirement that borrowers obtain private mortgage insurance for any mortgage with less than a 20% down payment.
The goal is to ease lending to people with high credit scores but small savings accounts since credit scores are more important for staying current with a mortgage than the size of the down payment you made to get that mortgage.
What do you think? Is this heading in the direction of making the same mortgage mistakes again that thrust us into the recession in the first place? We'll keep you posted on the progress of this lowering of the down payment requirements.