Repeating mortgage market mistakes

MARY REICHARD, HOST: Coming up next on The World and Everything in It: risky loans.

Between the years 2007 and 2009, the United States suffered the greatest economic decline since the 1930s. A global economic downturn followed. Taken together they created what we now call the Great Recession.

NICK EICHER, HOST: The crisis started in the housing market. A booming economy in the early 2000s created a high demand for housing. At the same time, the federal government pushed lax lending policies to encourage broader home ownership. That meant many people who couldn’t really afford homes bought them anyway. 

After the Great Recession, lawmakers passed new banking and borrowing regulations to stop reckless lending in the future. But market data has some analysts worried that those protections aren’t working. 

Here’s WORLD Radio’s Sarah Schweinsberg.

SARAH SCHWEINSBERG, REPORTER: Joe Gillet is a secondary mortgage manager at First Savings Bank in Omaha, Nebraska. He’s been in the mortgage business since the 1990s. He says today’s federal regulations make taking out a mortgage a much more detailed process. 

GILLETT: A typical file, you could get it done in 10 days. A file takes much longer now, uh, with just some of the compliance and regulations and the consumer protections. A typical file used to be about a quarter of an inch thick and now they range anywhere from three quarters to an inch thick with paper. 

That increased paperwork is the result of Dodd-Frank. That’s the 2010 financial reform law that changed the rules for how banks loan money. 

Gillett thinks some of the Dodd-Frank regulations are cumbersome and unnecessary. But, he says overall, their intent is to protect consumers from bad mortgages. 

GILLETT: Now the consumer gets an opportunity to look at the closing disclosure and they have to acknowledge it. And then we give them three days to review the documents to make sure they’re accurate. And just to verify that you’re catching all the liens and the debts and, um, making sure that you’re catching all real estate owned by a consumer. 

Despite that supposedly increased caution in approving home owners, some analysts say the federal government has been quietly pushing banks to give out risky loans again. 

MICHEL: The tide is definitely moving against doing something that I would consider to be sane and sensible. 

Norbert Michel is a housing finance expert at the Heritage Foundation. He says Fannie Mae, Freddie Mac, and the Federal Housing Administration are once again approving risky mortgages. 

MICHEL: The data shows this. These are high DTI, low credit score, low down payment loans, and those are some of the riskiest ones that we can have. Some of them are strikingly similar to the ones that went bad before the crash or during the crash. 

According to research from the Urban Institute, more and more homeowners have mortgage payments that take up half their monthly income. That’s well above what most experts agree is a reasonable payment. 

And while these agencies are approving riskier mortgages, they’re also backing the most mortgage debt in history. That’s 33 percent more than before the recession. 

MICHEL: And basically what you end up with is the federal government standing behind even more loans that are at least as high risk as the ones that were being made prior to the crash now and now the taxpayers are directly behind a lot of them.

But how is this possible? Wasn’t Dodd-Frank supposed to stop Fannie Mae, Freddie Mac, and the FHA from getting risky with taxpayer dollars? Wasn’t it supposed to stop subprime borrowers from taking out mortgages? Well, yes. At least on paper. 

Graham Steele directs the Corporations and Society Initiative at the Stanford Graduate School of Business. He helped write Dodd-Frank. Steele says since the bill became law, agencies haven’t implemented many of its regulations.

STEELE: So like the credit rating agencies, you know, there was supposed to be substantive regulation of that industry. The SEC didn’t really do anything meaningful there. 

And when it comes to the regulations that were put into place? Agencies and bank lobbyists have been quietly stripping those away too. 

STEELE: The facade is still there, but the substance is slowly getting rolled back piece by piece—through death by a thousand cuts. 

This deregulation began under the Obama administration and has continued under the Trump administration.

Despite the red flags, some industry players believe the housing market is solid. Lawrence Yun is the chief economist at the National Association of Realtors. He says high housing prices are only being driven by high demand. 

YUN: Homebuilders under built after the crash and they have been under building for essentially 10 consecutive years and consequently we have this housing shortage, uh, leading to home price appreciation that is in fact much faster than people’s wage growth.

Back in Omaha, banker Joe Gillett says as Fannie Mae, Freddie Mac and the FHA get more risky, so do the banks. Increasingly lax credit and financial standards make it easier to get risky mortgages approved. Gillett says that means sometimes he’s approving loans he doesn’t think are sensible.

GILLETTE: There has been times when I’ve seen people get into houses and I shake my head and I am very concerned for them because it’s their dream home. But every penny that they have is going to be spent to live in that house. 

But why approve a loan if he thinks it’s a bad idea? Gillett says if Fannie Mae and Freddie Mac say yes to a consumer, how can he say no? 

GILLETTE: I don’t think that I have or have the right to tell a customer, hey, Fannie Mae says you’re approved and turn that person down because of a personal opinion. That’s not right to the consumer. I can be aware and I can consult with them and say, can you afford this? But I don’t, I don’t make those rules, and I just have a personal opinion caring about my customers.

Reporting for WORLD Radio, I’m Sarah Schweinsberg.

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