ON Wednesday, the Obama administration announced a mortgage-relief plan that will lower homeowners' payments so they're more manageable. The goal: to cut monthly payments on loans in danger of default so they equal no more than 31 percent of a homeowner's income. (By comparison, many mortgages now eat up 40 percent to 50 percent of household income.)
The great irony here is that Washington now means to impose a "new" lending standard that is based on criteria that used to be typical in the industry - before Washington, prodded by affordable-housing advocates, pushed lenders to dilute their traditional underwriting values. Now that a huge chunk of the mortgage market based on these debased standards has melted down, the government is going full circle.
The push to loosen underwriting standards grew out of claims by some housing advocates and elected officials that banks weren't making enough mortgages to low- and lower-moderate-income households.
Among those who led the way was the Association of Community Organizations for Reform Now. In 1986, ACORN threatened to oppose an acquisition by Louisiana Bancshares until it agreed to new "flexible credit and underwriting standards" for low-income borrowers, including taking into account such income as public assistance and food stamps on mortgage applications.
ACORN and similar groups also attacked Fannie Mae, the giant government-sponsored mortgage agency, because its underwriters were "strictly by-the-book interpreters" of standards.
Under pressure from Washington, Fannie and its sister agency, Freddie Mac, agreed to start buying mortgages under new, looser guidelines. In 1993, Freddie made 28 changes to its underwriting standards, including approving low-income buyers without credit histories or with bad credit as long as they were current on rent and utilities payments - even though research had concluded that such buyers are more likely to default.
The mortgage giants began several experimental lending programs based on watered-down standards, including lending to borrowers whose mortgage payments were as high as 50 percent of monthly income. (At the time, most banks were aiming for mortgage loans with no more than a 33 percent income-ratio.)
These efforts gained the backing of some of our most authoritative federal institutions. In 1992, the Federal Reserve Bank of Boston produced a guide to equal-opportunity lending in which it claimed that conventional underwriting standards were "unintentionally biased." Among other things, the Boston Fed told lenders they should consider junking the industry's traditional income and debt ratios.
Over time, these programs moved from the pilot stage to a bigger share of the market - largely because politicians made expanding homeownership a high priority.
Under Clinton administration pressure Fannie Mae in 1999 announced a program to buy loans made to "borrowers with slightly impaired credit" - that is, ones who didn't qualify for mortgages under traditional standards. By 2001, 18 percent of Fannie's portfolio consisted of loans to people with credit scores below 680 - the traditional definition of riskier credit.
With its new mortgage-relief plan, the Obama administration has implicitly admitted that those standards were unsafe. But even this backhanded acknowledgement comes only because bailout efforts up until now have largely failed except in cases where borrowers are given new mortgages written to reflect former underwriting standards. That's about as far as we can expect government to go in admitting the mess it helped to make.
Original Source: http://www.nypost.com/seven/03062009/postopinion/opedcolumnists/feds_full_circle_on_mortages_158187.htm