In the aftermath of the financial meltdown, much of which was brought on by mortgages that were too easy to get by people who were “iffy” at best regarding their ability to repay their mortgage, we are beginning to see discussions about how mortgages should be arranged and marketed in the future. This is part of the “new normal” that we’re adjusting to in terms of expectations for housing prices and affordability in the future. Most experts agree that the housing bubble created a situation that while exhilarating while it was happening, was not worth the hangover afterward. So now, we’ve got to figure out how to remain sober with our mortgages in the future.
Part of the discussion is the role of government in encouraging home ownership. For many years, going back to the fifties, we’ve used various government or government sponsored agencies to expand homeownership in the US. These agencies include FHA, Fannie Mae and Freddie Mac. It appears that during the bubble, these agencies got too energetic in their activities and took on too many poor quality mortgages bundled as investments, and when lending from non-governmental sources dried up, they were left as largely the only game in town, so now they hold way too many mortgages. Many experts agree that we’ve got to reduce the role of these agencies, but the question is how to do it without having calamitous results. Such things are debated by politicians, who are aided by their favorite economists. Of course, we know that economists can’t agree on anything, so there’s no telling where all this might lead.
Wherever it leads, you can pretty much count on mortgages being more expensive in a variety of ways, and therefore available to fewer people buying houses priced lower than before. There are lots of other ripple effects that come from that direction. For examples of how our future mortgage market might look, all you have to do is travel north to our neighbors, the Canadians. They didn’t really participate in our housing bubble, and their banks didn’t fail, as did ours. How did they manage that? The reasons are that their lenders didn’t bear nearly the risk that ours did.
- Most mortgages are amortized at 15, 20, or 25 years- not 30
- Fixed rates run for up to 5 year intervals, then are adjusted for another 5 years- no 30 year fixed mortgages
- Required down payments are generally higher that ours
- The market includes stronger mortgage insurance requirements that provide real coverage and stability
- Most borrowers remain responsible for any loan balance left after foreclosure sale if the sale doesn’t cover it (likely)
- And for good measure, mortgage interest is not deductible from income tax
For more about the Canadian vs. US mortgage markets, check out THIS article from The American Enterprise Institute. For interesting comments on the debate about government involvement in mortgages from two traditionally very different points of view, HERE is an article from Huffington Post, and HERE is an article from The Heritage Foundation.