While this made it possible for many borrowers to keep getting loans and helped protect the housing market from further damage, the government's newly dominant role -- nearly 90 percent of all new home loans are funded or guaranteed by taxpayers -- has far-reaching consequences for prospective home buyers and taxpayers.All the efforts to increase the percentage of Americans who were homeowners has been a failure. Lax lending standards allowed the rate to rise to 69.3%, but that was a bubble of epic proportions, since many of those who were borrowing to buy homes had no way to pay for them once terms on adjustable rates rose above their initial teaser rates. With the shakeout in the real estate market, the homeownership rate sagged back to 67.4%, which is little different than had the lenders utilized more conservative and traditional lending terms.
The government has the power to decide who is qualified for a loan and who is not. As a result, many borrowers among both poor and rich are frozen out of the market.
Nearly one-third of those who obtained home loans during the boom years of 2005 and 2006 couldn't get one today, according to mortgage industry analysts. Many of these borrowers were never really able to afford their homes and should not have gotten loans. But many others could, and borrowers like them are now running into tougher government standards.
At the same time, taxpayers are on the hook for most of the loans that are still being made if they go bad. And they are also on the line for any losses in the massive portfolios of old loans at Fannie Mae and Freddie Mac, which own or back more than $5 trillion in mortgages.
There is growing evidence that many loans being guaranteed by the government have a significant risk of defaulting. Delinquencies are spiking. And the Federal Housing Administration, another source of government support for home loans, is quickly eating through its financial cushion as losses mount.
The tighter lending standards chafe at those who wanted to expand homeownership, and those who thought that expanding homeownership among minorities was a laudable goal. Of course, the economics of such moves were never considered, let alone the fact that these people lacked a way to pay for the homes and couldn't meet even reduced lending standards.
The move to higher lending standards will infuse the markets with a dose of fiscal realism and safer lending and credit.
Still, there are huge problems, including the fact that taxpayers are on the hook if even a small percentage of Fannie Mae or Freddie Mac loans go bad. The taxpayer hit? You don't want to know:
Taxpayers could be hit with a staggering tab even if a small proportion of loans go bad. Fannie and Freddie now own or guarantee more than $5 trillion in home loans. (That equals two-thirds of the debt the U.S. government owes.)The push to increase affordable housing by distorting the mortgage lending business economics was anything but affordable. It's been an unmitigated disaster.
And many could be in trouble. Mortgages owned and backed by the companies often required down payments of no more than 10 percent. With housing prices down sharply, many borrowers are underwater, owing more than their home is worth, so they cannot sell or refinance to pay off troubled loans.
As the economy has deteriorated, delinquencies are spiking and losses are mounting. In the past year and half, the companies have posted more than $150 billion in losses.
Similar risks threaten to engulf FHA. Nearly 8 percent of FHA loans at the end of June were either 30 days late or in the process of foreclosure, according to the Mortgage Bankers Association. That compares with 5.4 percent of such loans a year ago.
As a result, FHA has been exhausting much of its loss reserves, which are funded by premiums paid by borrowers. The reserves currently stand at an estimated 3 percent of all outstanding loans, half of what they were just a year ago. If the reserves fall below the 2 percent threshold set by Congress, they could require a taxpayer bailout.