A Sick Housing Finance System

Originally published in the Nevada Examiner on September 3, 2010

A lot of us who are now or who had been involved in Housing Finance wonder what the stars hold for the immediate future and the years to come. The underwriting process that we are witnessing now, are indeed very strict to the point that some borrowers just find the stringent rules to be absurd if not downright ridiculous. Well, isn’t this just right? We all deserve it! The fact of the matter is that, if we historically trace the roots of today’s mortgage problems and the collapse of the real estate market, a lot has to do with the breakdown of sensible underwriting procedures.

Prior to the 1990’s, we had common sense underwriting principles that require down payments, good credit and the due diligence of the lenders or mortgage agents to strictly verify if the borrowers and future homeowners have the ability to handle their mortgage debt. In 1992, the U.S. Congress passed the Federal Enterprise Safety and Soundness Act. The law basically imposed affordable housing mandates on Fannie Mae and Freddie Mac. Hey, this was the start of former President Bill Clinton’s era!

At the start of 1993, regulators have started to abandon the conventional tried and tested underwriting principles. They started to substitute liberalized lending standards which led to the influx of the no-down payment or minimal down payments and other weak, if not “sick” loans. By the year 2006, more than 30% of all home buyers put no money down.

Prior to the real estate meltdown, we saw the negative amortization loans soared sky-high which were sugar-coated with the very popular pseudonym “Option ARMS.” We were all in awe to see mortgage loans that started with a low 1% interest rate. These types of loans were so misunderstood by so many that eventually led to the catastrophic consequences to the common homeowner. Sheila Bair, chair of the FDIC noted that, “the financial crisis was triggered by a reckless departure from tried and true common sense loan underwriting practices.”

Given that we practically faced or continually face a sick and dysfunctional housing finance system, what do we do now, bright boys?

According to Edward Pinto, a stalwart in the Housing Finance system, the following should be done:
(1) We should require larger down payments and stricter underwriting standards
(2) Reliance on the private sector and capital
(3) Removal of affordable housing mandates

Pinto wrote, “If there is to be an affordable housing policy, it should not be implemented by hidden subsidies and loose lending standards, but instead made transparent and funded on budget by the government.”

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Art C. Javier, Enrolled Agent, a Tax Professional for more than 18 years in Las Vegas, is Federally Licensed to Represent Taxpayers Before the IRS. He was the Publisher and Editor-in-Chief of the former Las Vegas Examiner. A former Professor of Economics at the University of the Philippines and De La Salle University Manila, Art was also a Professorial Lecturer in Economics and Management at the Sokoto State University, Nigeria and CEU Graduate School of Business MBA Program, Manila.