Will There Be Another Mortgage Meltdown?

The Fannie Mae January 2015 National Housing Survey reported an increase in consumer confidence in the housing market. Some economists are predicting a positive future for the housing market due to recent job growth, improved consumer optimism, and higher household incomes.But, recent decisions from the Obama administration could cause the housing market to make a turn for the worst.

In an effort to make mortgages more affordable and widely available, President Obama announced last month that the Federal Housing Administration (FHA) plans to reduce annual mortgage-insurance premiums. This will make it easier for Americans to get mortgages who wouldn't ordinarily be able to afford them. While this plan sounds good on paper, it could set the housing market up for another meltdown.

Federal Housing Finance Agency Director Mel Watt reiterated this plan when he spoke before the House Financial Services Committee on Tuesday, January 27, at the "Sustainable Housing Finance" hearing. He announced that some of the low down payment, lax lending practices that eventually lead to the housing market crash and financial crisis will be brought back. Watt said the new guidance on the guarantee fee charged by Fannie Mae and Freddie Mac to cover the credit risk on loans from the federal mortgage agencies will be rolled out by the end of March.

After the financial crisis, there was a push to tighten lending standards. The new policies are calling for a departure from those standards and instead allowing low and moderate income families to purchase a home with little to no down payment. Having government programs that make mortgages more accessible and affordable have historically lead to overleveraged, high-risk loans. This is setting up homeowners to fail, and the housing market and taxpayers will also be the ones who suffer.

We've seen this scenario play out leading up to the financial crisis of 2008 when federal mortgage agencies and their regulators convinced private lenders to lower their lending standards.The push to get all Americans to own a home ultimately led to the financial crisis, and private lenders took the brunt of the blame.With the Obama Administration's efforts to lower lending standards, our nation could experience an all too familiar course of events.

Instead of imposing a federal affordable-lending policy, Americans who cannot currently get a mortgage can do so through seller-financing. If a homeowner seller finances his/her home and creates a mortgage note, families with poor credit scores who can't get a mortgage from a bank can still get a loan and purchase a home. Then the note holder can sell the note on the secondary market to a loan acquisition firm that will buy mortgage notes.The borrower makes payments to the note buyer, and the note seller gets an ample return on his/her investment and while the note buyer assumes the full risk.

As for Fannie Mae and Freddie Mac, the two government agencies have been involved in a mortgage price war to meet government mandates. Congress needs to step in and eliminate the impractical affordable housing mandates, as well as enact solid capital standards on the FHA that will no longer be ignored.

What are your thoughts on the Obama Administration's affordable-lending policy? Do you think it will lead to another housing meltdown?