The American mortgage market has never had a better standard of quality than right now, but does that mean that lenders have lowered their standards?
The Mortgage Market
The American mortgage market, which was originally considered a major factor in the 2008 global crisis, is now approaching a new peak in the standard of quality. However, there are concerns from market experts.
The market as a whole is now more reliable than it has been in the past. The most common mortgage-backed securities are now primarily with government agencies, and are the product of repackaging loans for investors. Due to policies which make them less of a boon to foreign investors, individuals outside of the U.S. government have been less involved in the mortgage-backed securities market. Since the collapse of the housing market, it’s these new policies that are making the market more stable.
The market is now surpassing its previous peak, though borrowers remain cautious. Even the Federal Reserve is making sure to distance itself from the mortgage-backed securities market. Despite having bailed out the market in the past. This could be due to the fact that the market is not predictable. For this reason, larger entities are ensuring their own safety.
Rising interest rates may lead lenders to pursue riskier business practices, leaving the borrower at risk. Currently, affordability programs and looser underwriting standards are becoming more apparent. There are more and more mortgages above the 43% level of debt-to-income ratio.
Subprime is a type of loan in which the rates are greater than prime, and offered to borrowers who do not qualify for prime rates. This was one of the key factors in the crisis, it was more common in the years leading up to it. The financial system fell apart as markets across the board were experiencing new lows. Turning even the most secure of assets into problems for the companies dealing with them. As people saw the financial system failing the government and central bank stepped in. However, no one was held accountable for these monumental errors in the system. Moving forward accountability is a prime objective in situations where guidelines are not being followed, potentially endangering the finances of borrowers.
The Mortgage Market Looking Forward
Mortgages in the United States are offering better returns. Programs being run through the government have assisted in the rising prices of homes and mortgage rates. The Federal Housing Finance Agency is adapting as the market progresses and both Fannie Mae and Freddie Mac are maintaining the standards which are necessary for stability. The number of people refinancing and seeking mortgages in the first place is lower which is a benefit.
The FHFA is a federal agency which was established in 2008. It oversees Fannie Mae and Freddie Mac, not to mention other Federal Home Loan banks. It was created in direct response to the financial collapse and to this day continues to remedy the lasting effect of the crisis.
The central bank is currently withdrawing from the market, leaving investors concerned. The faster the central bank pulls out the more volatile the market. The reliance on low-volatility has left many susceptible to complacency. With Fannie Mae and Freddie Mac soon to combine mortgages, many worry that liquidity is at risk. This is in addition to the potential for quality of mortgages to decline.
Investors are worried that the FHFA will continue to allow lending standards to slip. The incentive to undermine past standards is present as housing prices are surpassing their previous peak in 2007. Relaxation of the standards will allow for more borrowers to be able to obtain a home. However, this could lead to a second crisis should there be less oversight in these areas. The previous issues with mortgages being given to those with low prospects of paying them back are still existent. Should standards be lowered any further then it would not be unreasonable to expect a second crisis.