Philosopher George Santayana once famously observed, “Those who cannot remember the past are condemned to repeat it.” Unfortunately, our nation’s collective memory doesn’t seem to even extend back two decades.
Last month, Fannie Mae dropped the requirement that borrowers have a minimum credit score of 620. Freddie Mac had made a similar change earlier in the year. A credit score measures a person’s likelihood of paying back a loan. While it isn’t perfect, credit scores are widely used to evaluate risk. This change will make is easier for people with lower credit scores to obtain home loans.
Bill Pulte, director of U.S. federal housing, declared this a “big deal for consumers.”
It’s understandable that Pulte and these organizations would seek to help want-to-be homeowners. Home prices are at or near record highs around the country.
Removing this barrier might seem sensible. Pulte insisted this is a “small or nothing deal for underwriting.” But this ignores the fine print.
Decades ago, Congress created Fannie Mae and Freddie Mac to bolster the nation’s housing market. The companies don’t loan money directly. Instead, they purchase loans from banks. They then repackage some of those loans into mortgage-backed securities that investors purchase. Backed by the federal government, Fannie Mae and Freddie Mac guarantee the principal and interest payments on the loans they sell. Their reach is extensive.
This arrangement gives banks more money to lend. In theory, this keeps a steady supply of funding available for potential homebuyers. One might wonder if artificially inflating the amount of money available to lend has contributed to the country’s soaring home prices.
But anyone who remembers the 2008 housing crash should hear alarm bells going off. While there were several factors for the financial collapse, one underlying cause was risky home loans. Those mortgages had been sold and then repackaged as mortgage-backed securities. When borrowers stopped repaying their loans, the value of those securities plummeted. That rippled through the entire economy. The effects of that recession lingered for years.
That’s reason enough to be concerned about this move. The government should be very careful about opening the door to risky borrowers, especially when prices are at record highs.
What the housing market needs is more supply.
Washington should seek to lower prices, not lending standards.
— The Las Vegas Review-Journal
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