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Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Thursday, February 17, 2011

A More Fiscally Conservative Mortgage Market Ahead?

There were a multitude of causes for the recent “Great Recession”. Many blame Wall Street and the big banks. They surely deserve some of the blame. One major contributor, however, was our Congress, seemingly bent on providing housing for low-income families. They pushed Fannie Mae and Freddie Mac to offer low-down-payment mortgages to people who really couldn’t afford the cost of a home. This helped fuel a runaway real estate market that was helped by low interest rates.

The new regulations passed last year by Congress were touted as a key to preventing another such crisis. Yet the issue of what to do about of Fannie and Freddie was glaringly unaddressed by the legislation. Taxpayers were on the hook to pay off the billions of dollars of debt the government had guaranteed for Fannie and Freddie.

We were delighted this last week to hear that the Obama administration was recommending that government support for Fannie and Freddie be discontinued. The administration recommended several alternatives that would take several years to complete.

We will likely see less government backing for mortgages, higher mortgage insurance premiums, tighter underwriting rules and higher equity requirements for borrowers. Thus, it will be more difficult to buy a home and we will see fewer homeowners in the future. While that may see like a bad thing, it’s better than the alternative of another recession and housing crisis.

We should also note that banks are already beginning to require that homeowners make larger down payments. An article by Mitra Kalita, titled “Banks Push Homebuyers to Put Down More Cash” (February 16th in the Wall Street Journal) pointed out that, as part of its recommended changes, the Obama administration has recommended a minimum 10% down payment for conventional loans. In the article, it was noted that last year the average down payment for conventional loans was actually 22%, more than double what it was three years ago.

The good news is that these changes will help prevent an over-zealous housing market in the future. The bad news, however, is that these changes will make it more costly and difficult to obtain a mortgage and will likely slow down the housing recovery that is so important to our economy.


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