Is It Time To Relax Frannie’s Underwriting Criteria?

Like Felix Salomon, I’m left a bit puzzled by the statements Joe Nocera makes in his piece in the NYT today with regard to the housing market. He suggests, without offering any specifics, that more homes would be going into the hands of investors were it not for government policies that makes it difficult for them to buy.

It’s even become nearly impossible for well-heeled investors to buy rental properties. This is no small matter. At the peak of the bubble, the rate of homeownership approached 70 percent. Now it is falling toward 65 percent — which is more or less where it was before all the housing madness of the last decade. That means that millions of Americans who were briefly homeowners need to become renters again. They need a place to rent.

But somebody has to buy the homes they are leaving behind and turn them into rental properties. The most likely buyer is a professional investor who purchases rental properties for a living. Yet, absurdly, government rules have made it exceedingly difficult to make loans to investors who want to buy up rental properties. This only adds to the shadow inventory.

Felix points out that Fannie and Freddie have actually loosened their underwriting standards for investor loans though they are arguably and justifiably more stringent than during the bubble years.

I find Nocera’s article a bit puzzling from a couple of other perspectives.

First, there has been to the best of my knowledge no lack of investor buying activity over the past 18 months or so. There has been instead a lot of talk (here and here for example) about investors competing with first time  homebuyers. Perhaps more to the point, investors are coming in and doing all cash deals. If anything this has been one of the few bright spots in the market as investors probably soaked up inventory that might still be hanging around, and did so without leveraging up.

The Nocera column wasn’t just about investor loans, however. It was really more of a general rant about underwriting standards. Consider:

So that is what it looks like for the prospective borrower. Now look at it from the lender’s perspective. Chastened by the excesses of the bubble, mortgage lenders have swung hard in the other direction, becoming excessively, almost insanely, conservative. They demand high FICO scores. They won’t lend to anyone who is recently self-employed — even if the potential borrower has socked away a lot of money in the bank, or is making a good income. They won’t count income from capital gains.

He conveniently overlooks the fact that recently self-employed individuals have a nasty habit of becoming recently unself-employed or that capital gains can turn into capital losses quicker than you can say program trading. Has he missed the action in the stock market over the past couple of years.

These aren’t “insane” standards. They’re the sort of common sense, experience tested standards that allowed the mortgage markets to avoid the current debacle for decades.

Nocera seems to buy into the propaganda the real estate industry is feeding him. I don’t necessarily blame them, it’s actually rational to push for loser lending standards when you don’t have to live with their consequences. So long as you have a system in which the government is going to purchase mortgage loans, those profiting at the front end and passing on the risk are going to do their level best to ensure that the system allows them to generate the maximum number of transactions.

This is a good object lesson in why a private mortgage finance system might well be a better alternative. The industry is always going to push for the most lenient lending standards absent any skin in the game and as we know, Washington over time will acquiesce.


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