Freddie Mac and Fannie Mae To Lower Credit Lending Standards

Freddie Mac and Fannie Mae lending standards will be lowered in an attempt to boost the housing market.

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Fannie Mae and Freddie Mac To Loosen Lending Guidelines in a Bid to Boost the Housing Market.

The Obama Administration and federal regulators are concerned that the housing “recovery” is in jeopardy. As we noted last month the housing recovery that never was, is over. Existing home sales are falling as are mortgage applications, home ownership rates and new home construction.

Five long years of Federal Reserve money printing (quantitative easing) and record low artificially manipulated interest rates have failed to boost the housing market’s fortunes other than by driving home prices higher to unaffordable levels on the small number of homes being sold. An increase in housing inventory the past few months was supposed to add a boost to the housing market. It didn’t. As inventory increased, sales fell.

The economy has simply failed to produce enough qualified homebuyers as job and wage growth have stagnated while real estate and stock prices have soared. A new generation of homebuyers has not emerged. In “Who Will Buy the Homes to Support the Housing “Recovery” we noted:

Millennials, as we have pointed out since the beginning of Smaulgld.com, are in no position to buy homes because of their high unemployment/underemployment rates and crushing student loan debt. Household formation among millennials is low and prevailing economic circumstances are shutting them out of the housing market. For many millennials, staying at home may reflect a cultural and generational shift. Higher mortgage interest rates and higher home prices will put homeownership further out of reach.

Now the government is going to try and boost the housing market’s flailing fortunes by reversing the tightened lending standards imposed on Fannie Mae and Freddie Mac after the housing bubble of the mid and late 2000’s burst. Fannie and Freddie had gone bust in late 2008 and required a government bailout and take over, due in part to lax lending standards that caused massive losses at the two formerly government sponsored entities. As part of the government takeover new stricter lending requirements were imposed on the two lending giants.

The details of the new Fannie and Freddie rules are expected to be finalized in the coming weeks and most likely will include:

-looser credit standards;
-abandoning a proposal that would require larger down payments;
-abandoning a proposal that would limit the size of mortgages that Fannie and Freddie would back; and
-abandoning the practice of requiring lenders to repurchase mortgages when the borrower misses two mortgage payments in the first three years.

The foregoing proposals will put Fannie Mae and Freddie Mac in a precarious financial position and increase the likelihood that the two entities will face another bust as they try to jump start the housing market by loosening lending standards.

New Federal Housing Finance Agency Director Mel Watt, the regulator who oversees Freddie and Fannie, said “Housing finance is such a critical part of the economy to stop, or stand in place, is just not an option.”

Better to risk bankruptcy and tax payer funded losses than to not try to create another housing bubble!

Federal policy makers have yet to learn that an economy should not be driven by people moving in and out of used houses but rather the health of an economy should reflect the ability of people to do so. The new Fannie and Freddie lending guidelines may get more unqualified borrowers into houses, but will do nothing to improve the economy.