Lenders are increasingly approving low-down-payment loans, and government-sponsored mortgage giant Fannie Mae is buying more of them.
This is what Bernanke and friends have been trying to do for five years: restart the housing market. This is not a new bubble, merely a resuscitation. It will last as long as the Fed keeps making money available at below-market rates and as long as lenders continue to lower their standards:
“In general lenders have been willing to do more than they may have been willing to do in the past,” said John Forlines, chief credit officer for Fannie Mae’s single family business. “Our requirements have not changed significantly, but other parties taking risk, the lenders and mortgage insurance companies in particular, have been more flexible than they may have been in the past.”
Notice the waffle? “Our requirements have not changed significantly” while others in the food chain are now “more flexible” than they have been. Translation: lowering credit standards will start putting people with poorer credit into homes they can’t afford. There’s an echo here.
But they’re covering their bets by demanding mortgage insurance. That will raise monthly payments without much assurance that defaults will be reduced. Besides, who will insure lower credit risks, anyway?
Ah, I know: the FHA! This is the government loan insurer, backed by our taxpayer dollars, reinstituting moral hazard once again:
The FHA has raised premiums and will raise them yet again in April. FHA loans are becoming increasingly expensive.
With the FHA leading the way, private insurers (who lost their shirts just five years ago) are now ready to get back into the game: new money, bad memories!
Private mortgage insurers are starting to remove overlays on higher loan-to-value loans, meaning the percentage of the home value that is mortgaged. Low LTVs and high credit scores were the rule recently for the private insurers, but that may now be loosening, making these loans cheaper than FHA.
Fannie Mae is loving it:
In the first quarter of 2012, loans with between 3 and 10 percent down payment made up 15 percent of Fannie Mae’s business for home purchase loans. In the second quarter it rose to 17 percent and in the third to 18 percent.
Government guarantees, low-interest rates and bad memories: sounds like déjà vu to me.