In the past, it was possible for virtually everyone to get a few hundred thousand dollars to buy a home, as private lenders flooded the market, aggressively trying to get customers. The borrowers thus got what they wanted, i.e. the mortgage no matter what their financial history was.
However, things are not the same not any more. Currently, only one lender remains, which is the federal government. In order to rescue the firms from the financial crisis, the government took control a year ago of the two largest mortgage finance companies in the world, Fannie Mae and Freddie Mac.
Government’s new dominant role has caused some consequences for prospective homebuyers
Although this helped many borrowers to keep getting loans and protected the housing market from any further damage, the government’s new dominant role has caused some consequences for prospective homebuyers. Almost 90% of all the new home loans that are being given are funded or guaranteed by taxpayers.
The government solely has the decision power regarding the eligibility for a loan and the decision about who will get the loan and who will not. As a result, many borrowers are frozen out of the market.
Borrowers who could easily get loans in the past are now facing problem
According to mortgage industry analysts, nearly one-third of those who obtained home loans during the boom years of 2005 and 2006 couldn’t get one today. Although it is true that many of these borrowers were never really able to afford their homes and should not have gotten loans in the first place, but many others could, and borrowers like them are now facing tougher government standards.
Taxpayers are being affected indirectly
Taxpayers are being held responsible for most of the loans that are still being made, in case they go bad. And as the government owns most of Fannie Mae and Freddie Mac now, they are also on the line for any losses in the massive portfolios of old loans at the giant companies, which own or back more than $5 trillion in mortgages.
Also there are great chances that many loans that are being guaranteed by the government, have a significant risk of defaulting. Another source of government support for home loans, The Federal Housing Administration, is also running short of its financial cushion as losses mount.
Federal Reserve purchasing hundreds of billions of dollars of mortgages
With the aim of ultimately owning $1.25 trillion worth, The Federal Reserve is purchasing hundreds of billions of dollars of mortgages. Due to this, the mortgage market has been flooded with money, forcing down interest rates and assuring lenders they have somewhere to sell their loans. The Treasury Department has a similar, though smaller, program.
Government is pumping money into the mortgage market
During the past year, the government has pumped more money into the mortgage market than has been spent on Medicare or Social Security or the defense budget. In order to bail out banks and other struggling companies, the government’s expenditure has already reached about $1 trillion over the past year and is rising.
Private lenders should resume business
Generally, government officials do agree that private lenders should resume their traditional role as major providers of finance for home loans. But there are some decisions that have to made by the policymakers. They must decide a solution to the problem, i.e. a way to reduce support for the mortgage market without letting it collapse. They must also decide about the kind of support that the government should provide in the long run.
