WSJ today: "Add to the mix government-sponsored enterprises Fannie Mae and Freddie Mac, which have fueled the housing boom by making it easier for borrowers who can't afford to repay their student loans to take out bigger mortgages.
Here's out it works: Mortgage lenders have typically preferred that buyers have a total debt-to-income ratio less than 36%—meaning that monthly debt payments shouldn't exceed 36% of one's income. As housing prices climbed, however, Fannie and Freddie allowed home buyers with higher debt-to-income ratios to qualify for government guarantees.
In the second quarter of this year, 26% of new mortgages backed by Freddie had debt-to-income ratios above 45%. Fannie now guarantees mortgages for buyers with debt-to-income ratios up to 50% . But here's the kicker: Fannie and Freddie exclude much student debt for borrowers in Obama income-based repayment plans. This has enabled many people who can't afford to pay their student loans to take out mortgages that are $100,000 to $200,000 larger.
Take a couple with two kids that earns $75,000 a year and has $100,000 of student-loan debt. Under a standard repayment plan, they would have to pay about $1,150 per month. Under the Obama plans they would have to pay only about $250. If they apply for a mortgage, only $250 would be counted toward their debt-to-income ratio.
This would enable them to qualify for mortgages with monthly payments $900 larger than they otherwise could if they were paying down their student loans in full. At today's interest rates, they would qualify for a roughly $120,000 larger mortgage.
It gets better: If borrowers don't earn enough to make their monthly student-loan payments, no sweat. Mortgage lenders can count their student-loan payment as zero—meaning they can take out even larger mortgages. What could go wrong? For taxpayers, who stand behind the mortgages and student debt, a lot.
At the same time, Fannie and Freddie have reduced the required down payments for lower-income borrowers to 3% from 20% for conventional mortgages. A freelance website designer "ready to buy a home of his own" but still in need of his parents as co-borrowers needn't worry, Freddie's website says. He can still qualify for a 3% down payment.
As the housing market has slowed, the nation's biggest mortgage lenders in recent months began to chip in 2% toward the 3% down payment. Home buyers thus have to scrounge up only a few thousand dollars to buy a new home. Such accommodative policies helped fuel the run-up in prices and are now helping prop them up.
Nonetheless, the median home price nationwide has fallen 13% from its peak last autumn. That means some recent home buyers with low-down-payment mortgages could already be underwater.
Conventional wisdom holds that home owners are in better shape than they were before the 2007-2008 housing meltdown. That may be true, but the combined effects of higher interest rates and inflation could soon start to bite homeowners harder.
Home-insurance premiums are soaring , 20% on average over the last year. If homeowners have to buy a new car because their old one breaks down, their auto-loan payments will spike. Auto-loan and credit-card delinquencies are now at their highest levels in more than a decade. Struggling homeowners may pay their mortgages first to avoid foreclosure, but something may eventually give, and it may not be in housing.
One thing that's certain is that taxpayers are now standing behind trillions of dollars in risky mortgages and student debt. The former may be saved from default only because borrowers aren't repaying the latter."
