About seven years have passes since the big housing bubble burst and we learned the dangers of loose credit underwriting and over relaxed lending standards. Now, federal regulators are easing away from the stringent guidelines call for by the Dodd-Frank Act of 2010. The underlining purpose was to raise the quality of the “prime” mortgages that are pooled into mortgage backed securities sold to investors.
In 2011, under pressure to increase home sales regulators agreed to a debt-to-income limit as high as 43%. The belief was that lower underwriting standards would encourage homeownership and make mortgages more affordable. But the results are just the opposite.
During the late ’80s and early ’90s down payments were 10-20% and homeownership reached 64% (about where it is now) and 90% of the housing markets were considered affordable (home prices equaled 3x family income).
By 2011 only 50% of homes were considered affordable and by 2014 that percentage dropped to just 36% – even though down payments were as low as 5%.
NOTE: With a downpayment of 10%, a potential home buyer with $10,000 can purchase a $100,000 home. Drop that downpayment to 5% and the same buyer can purchase a $200,000 home. The result housing prices were driven up making most houses less affordable for low and moderate-income homebuyers and inducing these homebuyers to take greater risks.
Prior to the 1990s housing was more affordable because the housing market was not tax subsidized. Builders responded by building smaller homes with fewer amenities. First-time buyers could live in one of these “starter home” for a few years then sell and move up.
Interestingly, Representative Barney Frank — the Massachusetts Democrat who led the House Financial Services Committee during the crisis, and a champion of credit programs for low-income buyers — later admitted, “It was a great mistake to push lower-income people into housing they couldn’t afford and couldn’t really handle once they had it.”
Washington and Wall Street should proceed with great caution as they move toward a new housing/financing environment and take in the lessons of the past.