Mortgage Remedies or Government Missteps? An Analysis of 2 New Federal Lending Proposals Designed to Boost the Housing Market

As policy leaders develop plans to boost the struggling housing market, two recent proposals underscore the challenges of adapting federal agency mortgage underwriting standards to achieve a policy objective other than backing a safe and sound loan.

The first is President Obama’s recent announcement about revisions to the Home Affordable Refinance Program (HARP).

The second is the SAVE Act (Sensible Accounting to Value Energy), a Congressional proposal to require federal housing agencies to include estimated energy consumption expenses as an underwriting factor — along with principal, interest, taxes and insurance — for any federally backed mortgage.

HARP was enacted in 2009 at the height of the economic crisis to provide refinancing assistance to homeowners whose mortgages were underwater.  As initially designed, relatively few homeowners were able to qualify for participation in the program in part because the loan-to-value ratio was capped at 125%.  The goal of the current revisions is to increase the number of eligible homeowners by lifting the cap, reducing certain fees and changing other criteria.  Only mortgages sold to Fannie Mae and Freddie Mac on or before May 31, 2009 will be eligible for HARP refinancing.

The SAVE Act would update the underwriting and appraisal guidelines of the federal mortgage agencies to account for a home’s energy costs in establishing the loan-to-value ratio and affordability for a borrower.  The energy consumption factor would be included — along with principal, interest, taxes and insurance — for any mortgage insured, guaranteed or bought by Fannie Mae, Freddie Mac, the Federal Housing Finance Agency or other federal agency, which together account for 90% of the housing market.

Assisting homeowners with underwater mortgages and encouraging energy efficiency are two important, but distinct policy objectives.  Given the recent banking crisis and the continuing impact on the federal mortgage agencies and housing market, we should be cautious about revising underwriting criteria to address a specific goal or concern.  Mortgage lenders should be encouraged to make loans that are safe and sound and the definition of safe and sound should be clear and consistent for all lenders  in order to provide the foundation to buoy the economy over the long term.

Federal block grants to states for distribution to community-based organizations to provide direct grants, underwriting support and other housing stabilization programs might provide more effective and broad-based help for underwater homeowners because the programs are designed for the communities that they serve.  Targeted state and local programs might also be more effective at increasing and encouraging energy efficiency for homeowners and businesses.  Many such programs with a track record of positive results are in place already throughout New England and other regions of the country. Increasing support to existing organizations and programs would be a good place to start.

Related posts:

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3. Robo-Signed Mortgage Docs Date Back to Late 1990s
4. Federal Disaster Loan Deadline Fast Approaching for Tropical Storm Irene Victims in MA, CT, RI
5. Jury Convicts NH Man of Leading Massive Mortgage Fraud Scheme in Boston

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