Housing Crisis May be Over – But Government Mortgage Still Problematic

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Given that the housing market has mapped a quick return to health since the second half of FY2012, I’m sure Americans are glad to finally have reason for faith in the property sector. Rates of new construction have elevated month-over-month, and the combination of a shrinking inventory and rising demand for new homes has bolstered real estate values as well. Even the otherwise reticent Ben Bernanke has come forth and outright endorsed the health of the housing market. Overall, the effect has been self-propelling, as previously underwater properties regained value and became market-ready again, only perpetuating positive gains in the housing sector.

However, there remains one glaring challenge for the housing market as it turns the bend. According to new reporting from NPR, the mortgage landscape in the United States has left many homeowners directly indebted to Uncle Sam. Of the $1.9 trillion new mortgages tallied last year, $1.6 trillion are guaranteed directly by the federal government. While this might seem like a predictable circumstance, it means that if there’s another wave of mortgage defaults, the burden falls directly on the shoulders of taxpayers. In the same way that positive gains in the property sector have been self-propelling, a default wave could have a snowball effect when combined with the government’s heavy hand in national loan management.

Granted, this is less of an active threat to economic health than a potential side effect of a default wave, but it should still remain a concern among market observers. The impact, however, could be powerful if there’s another episode of economic downturn. If real estate values become depressed as a consequence of a double-dip, private taxpayers could be struck immediately afterwards by having to bear the consequence of bailing the government out of its own hefty mortgage bill. In the same way that the 2008 housing crash hit seemingly peripheral sectors in the U.S. economy, this ‘echo effect’ in mortgage default could do the same.

This government mortgage initiative was originally debuted during the early recession so as to aid Americans in putting down for new homes. It seems like these subsidies were intended to extend only throughout the recession, but judging by the current landscape they’ve shapeshifted into a sort of permanent policy. All things considered, the ability to lift mortgage responsibility from the hands of the public sector seems uncomfortably limited. As the NPR report notes, mortgage backing has been an historic government policy for aiding veterans and low-income earners, but the public sector’s role in aiding homeowners expanded drastically since 2008.

So, what’s the ultimate takeaway for homeowners and investors? It seems that concerned investors would be well advised to keep a pulse on the actions of the U.S. government, particularly in terms of loan policy. There seems to have been much consideration around tightening the cap on loans the government can guarantee, which would at least slow debt accumulation. If private capital makes more aggressive moves to subsume debt held by the public sector, it could shield taxpayers from the consequences of mortgage default. Otherwise, considering the gridlock on Capitol Hill and the sluggish pace at which policy changes, there’s a respectable chance that homeowners and property investors will have to be wary of public sector mortgage management for some time longer.

Photo: eschipul

About Author

Harrison Stowe is a writer for NVR Inc., a prime developer of Baltimore new homes. Addressing a range of topics including investing, mortgages, and real estate, Stowe combines finance knowledge with additional experience working with Ryan Homes in the current real estate market.

3 Comments

    • Great question Jeff, and one I can’t say I know the answer to off the top of my head. I’m going to say as a raw guess that the proportion of loans that are FHA/VA are substantively lower than they were a decade ago, and that the pure number of FHA/VA are not too drastically increased from the period leading up to the crash.

      • Jeff Brown

        What my son is seein’ now in our local San Diego market is that the FHA buyer has become a leper. Fortunately, though long term ominously, the conventional menu has just been augmented by a 3% down loan with less monthly mortgage insurance, and NO upfront premium. Talk about not learning from recent history.

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