Haven't We Learned Anything From the Meltdown?
There is no question that as the government pursued affordable-housing goals—with the Community Reinvestment Act providing approximately half of Fannie’s and Freddie’s affordable-housing purchases—trillions of dollars in high-risk lending flooded the real-estate market, with disastrous consequences. Over the last 20 years, the percentage of conventional home-purchase mortgages made with the borrower putting 5% or less down more than tripled, from 8% in 1990 to 29% in 2007 (see chart above). Adding to the default risk: of these loans with 5% or less down, the average down payment declined from 5% to 3% of the loan’s value.
As for Fannie and Freddie, most of the loans with 5% or less down that they had acquired by 2005 had down payments of 3% or even no down payment at all. From 1992 to 2007, the two entities acquired over $3.1 trillion in low-down-payment or credit-impaired loans and private securities backed by credit-impaired loans—and these are performing horribly: the delinquency rate on Fannie’s and Freddie’s remaining $1.1 trillion in such high-risk loans is 15.5% as of this past June 30, about 6.5 times the rate on the entities’ traditionally underwritten loans. All this risky lending, of course, drove the nation’s homeownership rate up and inflated a housing-price bubble.
Incredibly, the House Financial Services Committee is considering legislation that would broaden the scope of the CRA. Before it takes any action on HR 1479—which would expand the CRA’s mandates from banks to bank subsidiaries, mortgage bankers, credit unions, insurance companies, and other nonbank financial institutions.
Denise Tejada bought a house last month at the age of 20, thanks in large part to a loan guaranteed by the Federal Housing Authority. This story offers a dramatic demonstration that, despite the housing bubble causing the worst economic downturn in generations, the ideology of home ownership is alive and well in the United States and still being supported by the government.
Without question, Tejada's loan is toxic--to her and to the taxpayers who are backing the loan. Her house cost $155,000. Tejada's loan was apparently made on a micro-down payment of just 3.5%, the minimum down payment to qualify for an FHA loan. On top of this, however, she got an additional government backed loan to make improvements. Her total loans amount to $183,0000. In short, she was immediately underwater on her new house.
The monthly payments on her debt amount to $1,328. Her income is $2,470, leaving her with just $285 a week to live on. She's paying 54% of her income to make the mortgage payments. She earns that income by holding down one full time and two part time jobs. Obviously, this woman has a strong work ethic. But it also means her income is precarious. With unemployment still rising, she obviously should be worried about losing one of her three jobs. A loss of one of them would likely leave her unable to make the debt payments.
Thanks to Gettingrational for the second story.