The Problem With Rate Fixing

So I'm sitting here watching Forbes on Fox on a Satuday morning (yes, I have no life) and the talking heads are discusing the newest Republican plan to fix rates at 4%. Fortunately, most of them think this is a bad idea, they just don't know why so let me tell you.

Currently, we have the lowest national average for mortgage rates ever and it will likely be dropping a bit more as the Fed continues buying mortgage backed securities. That said, the lending guidelines that are set by Fannie and Freddie make these rates available onlty to the most deserving of borrowers. The people I help every day have 700 or higher credit scores,a 75% or lower loan to value, a good stable job they've had for years and plenty of assets. These people have a good rate but are looking for a great rate. Good for them but this will not help the housing market or stimulate the economy in any real substantive way. What we need is guideline changes that make acquiring a home easier. So far nothing has been done to fix the real problems and the fixes are readily available and free to implement.

There are three main changes that would create an immediate improvement in the marketplace and serve to stabilize the housing market. The first change that needs to be made is the reauthorization of Seller Funded Downpayment Assistance Plans. Non-proftis like HART, AmeriDream and others have been around a long time and only recently have come under scrutiny. The programs were legislated out on October 1st of last year due to data that indicated a higher default rate among those who use these programs. Much of the data used ny HUD and the Fed has been deemed erroneous however and now there is a movement to bring these programs back. HR600, a new bill in congress, has bi-partisan support and will likely pass. The difference between this law and others is that access to these programs is now limited to a higher quality of borrower. Passage of this bill is critical to getting first time buyers back to buying homes.

The second change that must be made is that stated income loans must come back. Whoa!, you say, weren't these loans the biggest problem? I answer, yes and no. Stated income loans have been around and successfully used for years. Long before anyone could get one of these loans and simply lie about their income these loans were used to help the successful, self-employed borrower with good credit and assets get a 70 to 80% loan. There is a way to do stated loan correctly and the Fed acted irresponsibly by simply outlawing them altogether. Now, successful, well off self-employed people are out of the market. There are 100s of thousands of these borrowers who would buy in this market in a heartbeat if they could. Guidelines can be implemented that keep the market safe and allow these peopke to still get in the game.

Fianlly, we need to allow buy and hold real estate investors, the professional landlords, to buy more property with Fannie and Freddie loans. Currently, guidelines allow these people the have only three financed investment properties and only four total financed properties. Until recently that number was nine. The rationale to the reduction is to lower the risk of the downturn to Fannie and Freddie. However, I beleive there is a way to determine if someone is a speculator or a landlord who buys and keeps real estate and we should allow landlord borrowers who are good at owning and managing real estate to buy up more of the inventory. This step would eliminate many of the vacant homes and would allow the low end of the inventory to get soaked up right away by people whose job is to provide housing for others. Keeping these quality borrowers out of the market is shameful.

Some people will read this and think "isn't that what got us into trouble in the first place?" While on the surface this may be true remember that these guidelines and programs were available long before the current housing/credit bubble and worked just fine when they were implemented with a little sanity and lenders used solid underwriting principals and some common sense. Ultimately, the lending pendulum is going to have to swing back toward a neutral center to get things back on track and no low rate price fixing will help someone who isn't allowed to buy or can't afford a downpayment.