Government Fighting Housing Slump on Multiple Fronts
The subprime mortgage crisis was one of the primary causes of the financial meltdown that rocked the U.S. at the end of the last decade. Unfortunately, though the downward spiral has ceased, economic recovery has been sluggish, once again due to the struggles of the housing market.
Historically, subprime mortgages make up around 8% of the market, but between 2004 and 2006 that number spiked to around 20%, with the majority of those mortgage loans carrying adjustable interest rates.
As the interest on these adjustable-rate loans started to rise, coupled with the drop in home value - By September 2008 U.S. home values were down an average of 20% - millions of homes across the country fell into foreclosure. The mass amounts foreclosures are expected to continue through 2013.
Other than the Federal Bailout and Wall Street reform, the Obama Administration's tactics to slow the foreclosure epidemic have been the most publicized and controversial issue of Obama's Presidency.
After months, if not years, of stagnancy and tepid attempts at boosting the housing market, the federal government is finally rolling up their sleeves by instituting new policies through three different agencies.
The Federal Housing Finance Agency has removed a criterion that has kept many of America's most needy homeowners from taking part in their Home Affordable Refinancing Program. One of their long-standing rules is that no loan can be refinanced if the mortgage equals more than 125% of the home's actual current value. Hopefully, removing this stipulation will allow some of the 11 million Americans who are struggling to make their mortgage payments get into more affordable loans.
The program is only available to homeowners whose mortgages are backed by Freddie Mac or Fannie Mae.
The two mortgage giants are planning to create a new investment product, pooling once-delinquent mortgages into a new type of security. These mortgages must be current for 12 consecutive months in order to be added to the pool. This should help get these distressed loans that have been sitting in Freddie and Fannie's portfolios off their books, thus providing some much-needed liquidity to the market.
Finally, the Federal Housing Administration has agreed to raise the maximum sized mortgage that they are willing to back to $729,750. The FHA currently backs 1/3rd of all new loans, and allow for down payments of 3.5%, instead of the industry standard 20%. This makes these high-cost loans much more attractive and therefore should give the housing market a much needed shot in the arm.
While these strategies might seem somewhat tame and inconsequential, given the massive amounts of foreclosures that are still taking place, experts and government officials fear that making sweeping, drastic changes could drastically stunt the organic process of returning to normalcy that the housing market must go through.
Hopefully, these three policy changes can help get the rusty wheels turning. By: Javi Calderon