As policymakers consider reforms to the role the federal government plays in the mortgage and housing markets, it’s critical to assess the amount of risk to U.S. taxpayers through loans insured by the government, and securitized by the government-sponsored enterprises Fannie Mae and Freddie Mac.
In considering these risks, it’s also important to understand the positive changes in the last decade to ensure that the loan features that triggered the 2008 financial crisis — no documentation, teaser rates, exploding adjustable-rate mortgages — have been eradicated from the market.
Our organizations worked alongside Congress, the Consumer Financial Protection Bureau, the Federal Housing Administration, the Federal Housing Finance Agency and the Department of Housing and Urban Development to promote reforms that helped eliminate the risks that resulted in the subprime housing crisis, while maintaining affordable mortgage credit for qualified homebuyers.
Recently, the discussion on mortgage risk has been colored by a single-minded focus on just one factor that lenders use to examine a borrower’s likelihood to repay a mortgage: the debt-to-income ratio.
Yes, the DTI is important. But it is just one of many considerations lenders use in combination when evaluating whether a borrower can and will repay a loan. Other factors including credit history, cash reserves, property equity and liquid assets also help to paint a more complete picture of a borrower’s true credit profile; and the true risks assumed by a lender.
Numerous studies have determined that DTI by itself is a weak predictor of a loan’s likelihood of default. Other recent studies have shown that a borrower’s liquid cash reserves are a far more important indicator of risk when unemployment is rising.
These more comprehensive characteristics, along with new laws passed in the wake of the crisis, ensure a greater focus on sustainable mortgage lending activities to creditworthy borrowers and prevent excessive risk taking. As a result, rates of serious delinquency and foreclosure remain at or near-historic lows across both GSE and FHA mortgages.
While another recession may be inevitable, federal reforms and actions by financial institutions help ensure taxpayers are protected in ways they should have been long before 2008. Specifically, Fannie Mae and Freddie Mac continue to take steps to protect taxpayers by transferring mortgage-loan risk to private investors on a large portion of their guaranteed loans.
By the end of 2018, the GSEs had transferred more than $90 billion of credit risk to the private sector, putting private capital ahead of taxpayers through credit risk transfer deals, a number that continues to grow every month. One only needs to look at the results from Fannie’s and Freddie’s annual “stress tests” to see the positive impact of the reforms that have been put in place.
Home prices are at or approaching record highs in many markets. In addition, mortgage default and foreclosure rates sit near record lows while GSE loans are significantly more stable because of stronger transparency and federal oversight.
Reforms should be thoughtful and balanced. And that focus must be on ensuring responsible, creditworthy Americans in every community of this country can access the capital needed to secure a mortgage — in good times and bad.
That is the role Congress envisioned when the FHA was created and the GSEs were first commissioned. That role remains just as critical, and indispensable, as it has ever been.
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