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Is the US heading toward another housing bubble?


This article is related to: Finance, Mortgages, Sheila Bair, Freddie Mac, Fannie Mae



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Is the U.S. headed toward another housing bubble?
Have new mortgage rules made it easier to buy a house?
October 29, 2014, 11:23 AM
New federal mortgage regulations don't require significant down payments. And that's only inviting a repeat of the 2008 financial crisis.

The new rules come at the behest of “housing advocacy groups, mortgage bankers and even some bond investors” who want to keep housing credit flowing, reports The New York Times. Regulators, apparently fearing loss-leery banks wouldn't lend under a new rule requiring they retain 5 percent of mortgages they sell, included exemptions that allow no-down-payment loans conveniently labeled as low-risk.

Government-backed Fannie Mae and Freddie Mac guarantee about half of mortgages and typically require about 20 percent down. But many other mortgages will be more likely to default under these new rules. And when they do, there will be “much bigger losses with zero percent down than 20 percent down,” warns Sheila C. Bair, former FDIC chairwoman.

Minimizing losses once defaults occur is an important rationale for requiring down payments. But the fundamental reason is that down payments help minimize default risk upfront. And they're evidence that borrowers have the financial wherewithal and, equally important, the discipline to make mortgage payments on time and in full.

Like looser auto-loan requirements lately, the new rules foolishly prize mortgages' availability over their quality. Which will fuel another housing bubble. Which makes another financial crisis more, not less, likely.
http://www.sun-sentinel.com/opinion/commentary/sfl-is-the-us-heading-toward-another-housing-bubble-20141029-story.html